58458 INDONESIA ECONOMIC QUARTERLY Maximizing opportunities, managing risks December 2010 i Preface The Indonesian Economic Quarterly reports on and synthesizes the past three months' key developments in Indonesia's economy. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy for the outlook for Indonesia's economic and social welfare. Its coverage ranges from the macroeconomy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia's evolving economy. This Indonesian Economic Quarterly was prepared and compiled by the macroeconomic analysis team at the World Bank's Jakarta office, under the guidance of Lead Economist Shubham Chaudhuri and Senior Country Economist Enrique Blanco Armas: Magda Adriani (rice prices), Andrew Blackman (trade flows, balance of payments), Andrew Carter (government revenues), Andrew Ceber (national accounts), Faya Hayati (prices), Ahya Ihsan (government expenditure and fiscal disbursements), Diva Singh (financial markets, monetary conditions, banking sector, and capital flows). Additional contributions were received from Pandu Harimurti (Jamkesmas), Amri Ilmma (poverty), Jon Jellema (Bantuan Langsung Tunai), Paavo Monkkonen (housing), Jemima Sy (water and sanitation), Victoria A. Beard, Retno Sri Handini, and Anna I. Gueorguieva (Monitoring and Evaluation). Tia Chandra, Kiyoshi Taniguchi and Ashley Taylor shared the editing and production. Enrique Blanco Armas, Jonas Fallov, Hassan Noura, Hari Purnomo, Vijay Ramachandran and Theo Thomas provided detailed comments on earlier drafts. For more World Bank analys is of Indonesia's economy: For information about the World Bank and its activities in Indonesia, please visit www.worldbank.org/id In order to be included on an email distribution list for this Quarterly series and related publications, please contact madriani@worldbank.org. For questions and comments relating to this publication, please contact ataylor2@worldbank.org. iii Table of contents Preface iii Executive Summary: Maximizing opportunities, managing risks viii A . ECONOMIC AND FISCAL UPDATE 1 1. The global drivers of Indonesia's external balance have strengthened 1 2. The outlook for domestic growth remains robust for 2011 1 3. On the back of global developments, balance of payments inflows rose further 3 4. Domestic financial markets have been boosted by the capital inflows 4 5. Food price shocks again dominate recent movements in inflation 7 6. Weakness in fiscal expenditures continues and tax revenue growth has slowed 8 7. Near-term risks are predominantly external, but domestic policies will determine the medium- term growth trajectory 10 B. SOME RECENT DEVELOPMENTS IN INDONESIA'S ECONOMY 12 1. Managing capital inflows: Policy options for Indonesia 12 a. Capital inflows have been on the rise in Indonesia this year, bringing benefits but also risks that necessitate an appropriate policy response ....................................................................... 12 b. Rising portfolio inflows raise macroeconomic and prudential concerns and heighten the risk of disruptive outflows ................................................................................................................... 13 c. Medium-term policies should aim to attract more FDI and strengthen the financial system through macro-prudential regulations ........................................................................................ 14 d. Indonesia has various short-term policy options, of which gradual appreciation and the sterilized accumulation of reserves may be the two most appropriate .................................... 15 2. Quality of public spending and disbursement profile in Indonesia 16 a. Improving the quality of public spending is a key priority for the Government ...................... 16 b. Budget execution is skewed towards the end of the fiscal year ............................................... 16 c. International comparisons highlight Indonesia's budget execution challenges ..................... 17 d. Budget under-spending and a skewed disbursement profile can hinder the effectiveness and efficiency of public spending ................................................................................................ 18 e. Impediments to disbursement and recent policy reforms ......................................................... 19 f. Looking forward ............................................................................................................................ 20 C. INDONESIA 2014 AND BEYOND: A SELECTIVE LOOK 21 1. Assessing the performance of an Indonesian unconditional cash transfer: BLT 23 2. Does JAMKESMAS protect the population from health expenditure shocks? 27 3. Housing and services for low-income households in Indonesia 31 4. Incentivizing local governments to take responsibility for water and sanitation services 34 5. National Monitoring and Evaluation (M&E) in Indonesia 38 a. International shift towards performance-informed policy making, planning and budgeting . 38 b. M&E in Indonesia........................................................................................................................... 39 c. Moving towards performance-informed budgeting and developing a coordinated M&E system ............................................................................................................................................ 41 APPENDIX: SNAPSHOT OF THE INDONESIAN ECONOMY 42 LIST OF FIGURES Figure 1: Rising equity and bond flows to emerging markets .......................................................... 1 Figure 2: Global commodity prices have picked up........................................................................... 1 Figure 3: Growth weakened slightly in Q3... ...................................................................................... 2 Figure 4: ...with agriculture particularly weak .................................................................................... 2 Figure 5: Agricultural exports have picked up ................................................................................... 4 Figure 6: ...including Italy and Belgium .............................................................................................. 6 Figure 7: Indonesia's public debt has fallen and reserves are rising ............................................... 6 Figure 8: Sterilization of reserve accumulation continues ................................................................ 7 Figure 9: Credit growth has been driven by working capital loans .................................................. 7 Figure 10: Inflation has risen over the year but remains below historic averages.......................... 8 Figure 11: Core inflation has increased only steadily while volatile prices (mainly food) have driven headline inflation ................................................................................................ 8 Figure 12: The rise in net portfolio inflows has dominated the financial account since 2009... .. 13 Figure 13: ...with a majority of non-resident portfolio inflows going into domestic government securities (SUNs) .......................................................................................................... 13 Figure 14: The Rupiah saw a marked appreciation in nominal and real terms in 2009, but more gradual in 2010 ............................................................................................................. 14 Figure 15: Foreign ownership of domestic assets has increased, but so too have reserves ...... 14 Figure 16: Capital expenditures are heavily skewed........................................................................ 16 Figure 17: Spending frequently under-shoots Budget levels ......................................................... 16 Figure 18: Indonesia's skewed disbursement profile stands out amongst regional peers .......... 17 Figure 19: Aggregate poverty is falling ............................................................................................. 21 Figure 20: Provincial disparities in poverty remain ......................................................................... 22 Figure 21: GoI social assistance program coverage, 2008 and 2009 ............................................. 26 Figure 22: BLT incidence and coverage, 2005 and 2008 ................................................................. 26 Figure 23: Jamkesmas health insurance covers almost half the poor population........................ 27 Figure 24: Individuals with Jamkesmas coverage are more likely to use inpatient services ....... 28 Figure 25: Changes in housing conditions in urban areas, 1988 - 2007 ........................................ 31 Figure 26: Housing materials, infrastructure and land title by expenditure deciles, 2007 ........... 32 Figure 27: Rent-to-income and-expenditure ratios .......................................................................... 32 Figure 28: Declining total access to improved water supply .......................................................... 34 Figure 29: Urban usage of unimproved water supply has risen ..................................................... 34 Figure 30: Quality of access to water supply and household income are highly correlated ....... 35 Figure 31: Depreciation in urban water utilities (PDAMs) can exceed new investment................ 35 Figure 32: Access to improved sanitation ........................................................................................ 35 Figure 33: Good Governance in Kota Palembang Leads to Better Services ................................. 36 LIST OF APPENDIX FIGURES Figure 1: GDP growth moderates ...................................................................................................... 42 Figure 2: Contributions to GDP expenditures .................................................................................. 42 Figure 3: Contributions to GDP production ...................................................................................... 42 Figure 4: Motor cycle and motor vehicle sales ................................................................................. 42 Figure 5: Consumer indicators .......................................................................................................... 42 Figure 6: Industrial production indicators ........................................................................................ 42 Figure 7: Real trade flows................................................................................................................... 43 Figure 8: Balance of Payments .......................................................................................................... 43 Figure 9: Trade balance ...................................................................................................................... 43 Figure 10: International reserves and capital inflows ...................................................................... 43 Figure 11: Term of trade and monthly export and import chained Fisher-Price indices .............. 43 Figure 12: Inflation and monetary policy .......................................................................................... 43 Figure 13: Monthly breakdown of CPI ............................................................................................... 44 Figure 14: Inflation amongst neighboring countries........................................................................ 44 Figure 15: Domestic and international rice price comparison ........................................................ 44 Figure 16: Poverty, employment, and unemployment rate .............................................................. 44 Figure 17: Regional equity indices .................................................................................................... 44 Figure 18: Broad Dollar Index and Rupiah spot ............................................................................... 44 Figure 19: 5 Year local currency bond yields ................................................................................... 45 Figure 20: Sovereign USD Bond EMBI Spreads ............................................................................... 45 Figure 21: International commercial bank lending ........................................................................... 45 Figure 22: Banking sector financial indicators ................................................................................. 45 LIST OF TABLES Table 1: Robust growth to continue through 2011 .......................................................................... viii Table 2: Aggregate GDP projections for 2010 and 2011 are broadly unchanged ............................ 3 Table 3: Record balance of payments inflows expected for 2010..................................................... 4 Table 4: Indonesia's CDS spreads are well below several investment-grade sovereigns... .......... 5 Table 5: The approved 2011 Budget projects a higher deficit than currently projected for 2010 10 Table 6: Ministry of Health budget allocation and target performance .......................................... 18 Table 7: Summary of BPK audit findings on the road sector .......................................................... 19 Table 8: BLT recipients found jobs at a greater rate ........................................................................ 25 Table 9: BLT households also avoided reductions in school participation and increases in child labor .............................................................................................................................. 25 Table 10: BLT Deduction Frequencies, Amounts, Actors, and Uses.............................................. 26 Table 11: M & E Systems .................................................................................................................... 39 Table 12: National Level Indicators used by Central Governments................................................ 39 Table 13: Agencies and M&E Mandates in Indonesia ...................................................................... 40 Table 14: Budget outcomes and estimates ....................................................................................... 46 Table 15: Balance of Payments .......................................................................................................... 46 LIST OF BOXES Box 1: Moody's puts Indonesian government bonds on review for ratings upgrade ..................... 5 Box 2: Allocation and spending for the Ministry of Health .............................................................. 18 Box 3: Enhancing internal control and supervision can improve quality of spending ................. 19 Box 4: A brief introduction to the Jamkesmas program .................................................................. 28 ABBREVIATIONS AND ACRONYMS APBD Anggaran Pendapatan dan Belanja Daerah MenPAN Kementerian Pemberdayagunaan (Sub-national budget) Aparatur Negara (State Ministry of Administrative Reforms) APBN Anggaran Pendapatan dan Belanja Negara MoF Ministry of Finance (State Budget) Askes Asuransi Kesehatan mom month-on-month BAPEPAM Capital Market and Financial Institution MSME Micro, Small, and Medium Enterprises Supervisory Agency BAPPENAS Badan Perencanaan Pembangunan MTEF Medium-Term Expenditure Framework Nasional (National Development Planning Agency) BI Bank Indonesia OECD Organization for Economic Co-operation and Development BKPM Badan Koordinasi Penanaman Modal PAD Pendapatan Asli Daerah (own Source (Indonesia Investment Coordinating Board) Revenue of sub-national government) BLI Base-line Indicator PBB Performance Based Budgeting BoP Balance of Payments PFM Public Financial Management BLT Bantuan Langsung Tunai (cash transfer) PPP Purchasing Power Parity BPN National Land Agency PLN Perusahaan Listrik Negara (State Electricity Company) CDS Credit default swap PMK Peraturan Menteri Keuangan (Minister of Finance Regulation) CPI Consumer price index PNS Pegawai Negeri Sipil (Civil Servants) DIPA Daftar Isian Pelaksana Anggaran (Program qoq quarter-on-quarter Budget Authorization Document) EMBI Emerging Market Bond Index RPJM Rencana Pembangunan Jangka Menegah (Medium-Term Development Plan) EME Emerging Market Economies RPJMN Rencana Pembangunan Jangka Menengah National (National Medium Term Development Plan) FDI Foreign Direct Investment SBI Sertifikat Bank Indonesia (Bank of Indonesia Certificate) FY Fiscal Year SME Small Medium Enterprise GDP Gross Domestic Product SOE State-owned Enterprise GoI Government of Indonesia SUNs Surat Utang Negara (government securities) IDR Indonesian Rupiah UKP4 Unit Kerja Presiden Bidang Pengawasan dan Pengendalian Pembangunan (The Presidential Working Unit for Supervision and Management of Development) Keppres Keputusan President (Presidential Decree) USD US dollar JAMKESMAS Jaminan Kesehatan Masyarakat (Health WB World Bank Insurance Reform Scheme) M&E Monitoring and Evaluation yoy year-on-year Executive Summary: Maximizing opportunities, managing risks Global drivers of Key global drivers of Indonesia's external balance, namely capital inflows and commodity Indonesia's external prices, have strengthened. The challenge for Indonesia is to maximize the opportunities balance, including capital that this brings, in terms of enhancing future growth and making investments that can inflows, have improve the welfare of the entire population, while managing the associated risks. strengthened Strong capital inflows, particularly portfolio, have been seen across emerging markets, including Indonesia. These inflows are driven by yield differentials and the stronger growth prospects, and improved creditworthiness, of emerging economies relative to heavily- indebted, higher-income economies. Further quantitative easing in the US has provided an additional, cyclical boost to this trend. Commodity prices have Global commodity prices also picked up in recent months. In November, the US dollar made further gains price of non-energy commodities rose by 3.4 percent over the month with food and raw material prices up by 4.9 percent and 7.6 percent, respectively. The underlying drivers were strong growth in demand from emerging economies, particularly China, and also supply disruptions in the agriculture sector. Domestically, growth Annual GDP growth weakened in Q3 2010 for the first time since Q2 2009. However, at softened in Q3... 5.8 percent year-on-year, Indonesian growth remains relatively strong compared with other countries in the region. Domestic factors played the main role in explaining the weaker Q3 growth. These included weather-related disruptions to agriculture and mining and quarrying, for example. Quarterly growth for retail trade, services, and manufacturing performance was also affected by the Ramadan period. On the expenditure side, a slight weakening in the contribution of private consumption to growth was offset by substantial gains for government consumption and investment, as well as net exports. ... but the growth forecast Due to the softer third quarter figures, the World Bank's 2010 growth forecast has been for 2011 remains at 6.2 revised downward by 0.1 percentage point to 5.9 percent (Table 1). Looking forward, the percent recent strength of investment is expected to continue. Higher frequency indicators of consumption are also supportive. In terms of external demand, the forecast for real export growth for 2011 has been downgraded slightly due to base effects from the strong performance of 2010 and the downward revision to the forecast for major trading partner growth. The adverse economic impacts of the natural disasters that have hit Indonesia in recent months, such as the Mt. Merapi eruptions, are expected to be localized. Overall, the growth forecast for 2011 remains unchanged from the September IEQ at 6.2 percent. Table 1: Robust growth to continue through 2011 2009 2010 2011 Gross domestic product (Annual percent change) 4.5 5.9 6.2 Consumer price index* (Annual percent change) 2.6 6.2 6.0 Budget balance** (Percent of GDP) -1.6 -1.5 -1.8 Major trading partner growth (Annual per cent change) -0.8 6.6 4.0 Note: * Q4 on Q4 inflation rate. ** Ministry of Finance projection, 2011 figure is approved Budget. Sources: Ministry of Finance, BPS and other national statistical agencies via CEIC, Consensus Forecasts Inc., and World Bank Movements in volatile Rising food prices moved headline CPI inflation up to 6.3 percent year-on-year in food prices continue to November, from 5.7 percent in October. Grain prices (including rice) rose by 25 percent affect headline inflation year-on-year, the highest rate since 2006. As the poor consume a greater share of such food items in their consumption bundles, the gap between the headline inflation rate and the World Bank's poverty basket inflation rate widened further. Core inflation remains subdued (at 4.3 percent year-on-year in November). Even though it is gradually increasing, it still remains well below levels seen in 2008. Reflecting the contribution of volatile items to recent inflation developments, Bank Indonesia maintained its policy rate at 6.5 percent in December. Reflecting global Balance of payment inflows have been boosted by the performance of both the financial developments, balance of account and the trade balance. In the first three quarters of 2010, Indonesia's financial payment inflows have and capital account net inflows moved well above pre-crisis average levels. Net portfolio risen inflows accounted for the vast majority of this trend, particularly into government securities. Foreign direct investment inflows are also on an upward trend, but remain lower than elsewhere in the region. Although net non-resident portfolio outflows were observed in November, this was mainly due to a fall in foreign holdings of Bank Indonesia certificates (SBIs), following the suspension of 3-month SBI auctions. In early December further non-resident inflows into government securities and local equities were seen. Parliament has approved The programs and priorities in the 2011 Budget approved by Parliament are generally in the Budget for 2011 line with the proposed Budget. Much-needed capital expenditures will receive a substantial increase in allocated funds. The overall deficit was increased slightly to 1.8 percent of GDP, compared with 1.7 percent in the proposed Budget. Government revenue growth in the year-to-date has slowed since the September IEQ. In addition, as in recent years, weak disbursement was seen through the first eleven months of 2010. Although some reforms to improve budget execution have been introduced, some long-standing issues constraining timely budget disbursement still persist. Reflecting these two trends in performance over 2010 to date, the World Bank projection for the overall deficit in 2010 is 1.1 percent of GDP. This compares with the earlier Government Semester I Report projection of a deficit of 1.5 percent of GDP. The near-term risks are Rising capital inflows over 2010 have led to policy challenges for many emerging market mainly external, economies, including Indonesia. In the short-term, Indonesia still remains vulnerable to particularly relating to adverse shocks to investor sentiment. Further measures to shift inflows towards longer- capital inflows term flows can help to mitigate this risk, particularly policies to enhance incentives for foreign direct investment. Looking to the medium-term outlook, the main domestic risk is whether the policies required to boost growth to 7 percent are adopted and implemented. This risk provides both upside and downside potential around the baseline outlook. Coordinated action will be required to address Indonesia's infrastructure needs, to address the investment climate-related constraints on growth, to enhance the creation of quality employment, and to ensure that the benefits of growth continue to be shared across the population. Policies aimed at Different aspects of poverty and service delivery are the focus of the medium-term policy addressing vulnerability discussion in this IEQ. Social protection programs can help limit the vulnerability of to poverty and improving households to poverty. For example, the Government of Indonesia employed a nationwide access to basic services temporary cash transfer program for poor households, Bantuan Langsung Tunai (BLT), in across the population can help to promote further 2005 and 2008 to limit the impact on household welfare of upward adjustments in fuel inclusive growth going prices as subsidies were cut. Providing financial protection from necessary health forward expenditures is also one of the health development goals in Indonesia. In this area, the tax-financed Jamkesmas health insurance for the poor program plays a key role, accounting for two-thirds of Indonesians with formal health insurance coverage. On access to basic infrastructure services, the Government's National Medium-Term Development Plan, RPJMN (2010-2014), sets out an ambitious agenda for water and sanitation. National government budgets for the sector are to rise markedly and annual special allocation grants will become available to support local government investments in community-based water and sanitation systems. These are signs that positive steps are being taken to curb the recent downward trend in service levels. Housing conditions in Indonesia are also modestly improving. With ongoing urbanization, government attention on urban housing becomes increasingly important so as to ensure infrastructure provision, protect property rights and mitigate externalities such as congestion and pollution. Finally, monitoring and evaluation (M&E) information can be used to inform assessments of a government's progress in addressing poverty through the delivery and receipt of public goods. Indonesia is shifting towards a performance-informed budgeting system, an important input to which is M&E information. Future steps in developing coordinated M&E systems will likely include greater information sharing, improving systems and building consensus on indicators, formats and coordination across agencies. ix A. ECONOMIC AND FISCAL UPDATE 1. The global drivers of Indonesia's external balance have strengthened Global portfolio capital Strong growth in capital inflows has been seen across emerging markets over 2010 flows to emerging (Figure 1). Global flows to emerging markets, covering equity and bond issuance and markets have surged in bank lending, reached USD 403 billion in the first ten months of the year, albeit weakening recent quarters in October. This compares with a total of USD 353 billion in 2009 as a whole. Inflows have been driven by yield differentials and the stronger growth prospects, and improved credit worthiness, of emerging economies relative to heavily-indebted higher-income economies. Further quantitative easing in the US has provided an additional cyclical boost to this trend. Policymakers throughout emerging economies are grappling with the appropriate policy response to mitigate macro and prudential concerns relating to these inflows (Part B provides a more detailed discussion of these issues). Commodity prices have Global commodity prices have also picked up in recent months (Figure 2). In November, made further gains non-energy commodity prices rose by 3.4 percent on the month in US dollar terms, while food prices were up 4.9 percent and raw materials up 7.6 percent. The underlying drivers are the strong growth in demand from emerging economies, particularly China, and also certain supply disruptions, particularly in the agriculture sector. Looking forward, the World Bank US dollar global commodity forecasts have been upgraded for 2010 and 2011 (with the level of the forecast for the non-energy and energy indices in 2011 upgraded by 9.8 percent and 6.7 percent respectively). Figure 1: Rising equity and bond flows to emerging markets Figure 2: Global commodity prices have picked up (capital flows to emerging markets, USD billion) (USD global commodity price index, index Jan 2009=100) 500 500 180 180 Banks Equity Bonds 400 400 160 160 Energy Non-energy 300 300 140 140 200 200 120 120 Agriculture 100 100 100 100 0 0 80 80 2008 2009 2010 Jan-Oct Jan-09 Jul-09 Jan-10 Jul-10 Source: World Bank DECPG Source: World Bank After a strong rebound, Following their strong rebound, growth in many of Indonesia's major trading partners the growth of Indonesia's (MTP) has moderated. The weighted MTP growth reached 7-8 percent in the first half of major trading partners 2010 but fell to 6 percent in Q3. This normalization of growth rates among MTPs is has moderated expected to continue. 2. The outlook for domestic growth remains robust for 2011 Growth in Q3 was slightly GDP growth on a year-on-year basis weakened in Q3 for the first time since Q2 2009 lower than expected (Figure 3). The performance was slightly lower than expected at 5.8 percent year-on-year (yoy), or 1.2 percent quarter-on-quarter (qoq) seasonally adjusted. Growth was, however, relatively strong compared with other countries in the region. For example, Malaysia and Thailand saw quarterly contractions on a seasonally adjusted basis. While in other regional economies the performance was mainly driven by the manufacturing sector, for Indonesia, domestic temporary factors also played a role. Due to weather-related disruptions, agricultural production was particularly weak in Q3, down 0.1 percent qoq seasonally adjusted. Construction, mining and quarrying activity Indonesia Economic Quarterly Maximizing opportunities, managing risks was also dampened due to similar factors. However, in terms of contributions to quarterly growth there were also falls for retail trade, services and manufacturing (likely due to Ramadan-related factors). Communication and transport growth held up well (Figure 4). Figure 3: Growth weakened slightly in Q3... Figure 4: ...with agriculture particularly weak (percentage change in real GDP) (contribution to quarter-on-quarter seasonally adjusted growth, percent) Agriculture Mining and construction Percent Percent Manufacturing Com & trans 4 8 Retail trade Other (incl services) Year on year GDP* (RHS) Percent Percent 3 6 2 2 QoQ seas. adjust 2 (LHS) 4 1 1 Average (LHS)* 1 2 0 0 0 0 -1 -1 Sep-03 Jun-05 Mar-07 Dec-08 Sep-10 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Note: * Average QoQ growth between Q1 2000 and Q2 2010 Note: Contributions may not sum to overall GDP growth due Source: BPS, World Bank seasonal adjustment to seasonal adjustment of each individual series Sources: BPS and World Bank staff calculations Investment growth made On the expenditure side, on a quarterly-growth basis, a slight weakening in the a strong contribution on contribution of private consumption was offset by substantial gains for government the expenditure side consumption and investment. The rise in investment spending was driven by machinery equipment investment, perhaps due to the strength of the exchange rate lowering investment prices but also expectations of sustained demand for production going forward. Net exports also contributed strongly, although this was offset by the large statistical discrepancy. Growth of 6.2 percent is The softer Q3 growth contributed to a small downward revision in the World Bank's forecast for 2011, up on forecast for 2010 to 5.9 percent from 6.0 percent in the September IEQ (Table 2). Looking an expected 5.9 percent forward, monthly indicators of consumption and investment remain supportive. For for 2010 instance, consumer confidence has rebounded following its downturn during the previous mid-year food price spikes. Motor vehicle sales picked up in October following the drop during Ramadan. Growth in real exports has been downgraded slightly for 2011, due to base effects from the strong performance of 2010 and the forecast revision to major trading partner growth. The downward revision for government consumption growth reflects ongoing weakness in disbursement. The real economy impact of the natural disasters which have hit Indonesia in recent months, such as the Mt. Merapi eruptions, is expected to be localized with limited impact on national GDP. The growth forecast for 2011 is unchanged at 6.2 percent. However, moving growth upwards to the RPJM-N (National Medium-Term Development Plan) targets of around 7 percent for 2013 and 2014 will require concerted policy actions over the coming year in areas such as infrastructure and investment climate. THE WORLD BANK | BANK DUNIA December 2010 2 Indonesia Economic Quarterly Maximizing opportunities, managing risks Table 2: Aggregate GDP projections for 2010 and 2011 are broadly unchanged (percentage change, unless otherwise indicated) Annual Year to December quarter Revision to Annual 2009 2010 2011 2009 2010 2011 2010 2011 1. Main econom ic indicators Total Consumption expenditure 6.2 4.4 5.5 5.9 7.0 3.6 -0.8 0.1 Private consumption expenditure 4.9 5.0 5.1 4.0 5.7 4.3 -0.3 -0.2 Government consumption 15.7 1.2 8.6 17.0 13.4 0.4 -4.3 2.2 Gross fixed capital formation 3.3 8.6 10.0 4.2 9.7 9.6 0.3 0.8 Exports of goods and services -9.7 12.5 10.3 3.7 5.8 11.6 1.0 -0.7 Imports of goods and services -15.0 13.4 10.3 1.6 3.9 13.5 -1.6 -1.3 Gross Dom estic Product 4.5 5.9 6.2 5.4 5.8 6.5 -0.1 0.0 Agriculture 4.1 2.3 3.5 4.6 1.0 4.3 -1.2 0.4 Industry 3.5 4.3 5.0 5.1 4.3 5.0 0.0 -0.3 Services 5.7 8.4 8.0 5.9 8.4 8.4 0.2 0.1 2. External indicators Balance of payments (USD bn) 12.5 23.5 11.2 n/a n/a n/a 4.5 2.4 Current account balance (USD bn) 10.5 6.9 -1.9 n/a n/a n/a 5.1 -0.7 Trade balance (USD bn) 21.0 20.6 10.9 n/a n/a n/a 6.7 0.4 Financial account balance (USD bn) 3.6 18.3 12.8 n/a n/a n/a 1.9 3.1 3. Other econom ic m easures Consumer price index 4.8 5.1 6.3 2.6 6.2 6.0 0.0 -0.1 Poverty basket Index 5.8 8.4 8.5 2.9 11.1 6.8 0.6 1.1 GDP Deflator 8.5 7.4 10.0 6.6 8.0 9.9 -1.3 -2.2 Nominal GDP 13.4 13.7 16.9 12 14.2 17.1 -1.6 -2.3 4. Econom ic assum ptions Exchange rate (IDR/USD) 10356 9080 9000 9475 9000 9000 -11.1 0.0 Interest rate (SBI, 1 month) 7.3 6.4 6.5 6.5 6.5 6.5 0.0 0.0 Indonesian crude price (USD/bl) 61.6 76.6 75.3 75.1 75.3 75.3 -0.8 -1.7 Major trading partner grow th -0.8 6.6 4.0 3.4 5.6 4.9 0.1 -0.3 Note: Projected trade flows relate to the national accounts, which may overstate the true movement in trade volumes and understate the movement in prices due to differences in price series. Source: MoF, BPS, BI, CEIC and World Bank projections 3. On the back of global developments, balance of payments inflows rose further Both the trade balance The overall balance of payments surplus for the first three quarters of 2010 of USD 19 and financial accounts billion exceeded the highest annual inflow previously recorded (USD 14.5 billion in 2006). contributed to rising Reserves have risen to USD 93 billion at the end of November. Both the financial and balance of payments current balances posted strong performance in Q3. inflows On the current account, the trade balance surplus has rebounded strongly from the temporary small deficit of July. In October the balance reached USD 2.1 billion, after a USD 2.6 billion surplus in September. Agricultural exports have picked up strongly, contrasting with the weak performance of agricultural GDP (Figure 5). This reflects the larger share of food crops in agricultural GDP (just under 80 percent for the first three quarters of 2010). Non-food crops, such as vegetable oils, account for most of agricultural exports (67 percent over the same period) and have benefited from rising global commodity prices. Manufacturing export growth faltered in September (although this might reflect Ramadan-related effects). On the import side, capital and intermediate goods continue to be the main drivers of growth, in line with buoyant investment. THE WORLD BANK | BANK DUNIA December 2010 3 Indonesia Economic Quarterly Maximizing opportunities, managing risks Financial account inflows The strength of Indonesia's financial account over 2010 should be viewed in the context of were boosted by strong global flows towards emerging markets discussed above. Pull factors are also at play. portfolio flows, and rising These factors include Indonesia's strong economic growth, macro policy management FDI and rising domestic demand. As a result, financial account inflows moved higher in Q3, and the numbers for Q1 and Q2 were also revised upwards. Portfolio flows accounted for the largest share of net financial inflows, and within them purchases of longer-term government securities (USD 5.9 billion of a total USD 12.4 billion of net portfolio inflows in the first three quarters of 2010). However, FDI also appears to be on an upward trend (although it is difficult to strip out from the balance of payments data the contribution of new investment from that of reinvested earnings). Figure 5: Agricultural exports have picked up Table 3: Record balance of payments inflows expected for 2010 (USD billion, 3 month moving average) (USD billion) 2007 2008 2009 2010 2011 Balance of Payments 12.7 -1.9 12.5 23.5 11.2 Current Account 10.5 0.1 10.7 6.9 -1.9 Trade Balance 20.9 9.9 21.0 20.6 10.9 Income Balance -15.5 -15.2 -15.1 -18.6 -18.1 Transfers Balance 5.1 5.4 4.9 4.9 5.4 Capital & Financial Accounts 3.6 -1.8 3.5 18.4 13.1 Capital Account 0.5 0.3 0.1 0.1 0.3 Financial Account 3.0 -2.1 3.5 18.3 12.8 Direct Investment 2.3 3.4 1.9 7.9 5.4 Portfolio Investment 5.6 1.8 10.3 15.9 14.3 Other Investment -4.8 -7.3 -8.8 -5.5 -6.8 Foreign Reserves (a) 56.9 51.6 66.1 92.8 (a) 2010 value reflects value at end of November Source: BPS and World Bank staff calculations Sources: BI and World Bank staff projections The overall balance of Forecasting Indonesia's balance of payments in the current global environment is a payment forecasts have difficult task. Projections are sensitive to the global outlook for commodity prices and been upgraded for 2010 investment sentiment towards emerging markets. However, continuing net capital inflows and 2011 during the second half of 2010 are expected to support an annual balance of payments surplus in excess of the historic high of USD 14.5 billion in 2006 (Table 3). On the current account, the trend of higher import growth relative to that of exports, reflecting the relative strength of domestic demand, is expected to lead a gradual move of the current account from surplus to deficit. Higher bond amortizations will also contribute to the contraction in the overall inflows in 2011. The regular fluctuations in public debt issuances and loans drawings and repayments will continue to create volatility in the quarterly balance of payments. In addition to forecasting difficulties due to international factors, statistical features also complicate the picture. In particular, since Q1 2009 there has been a widening divergence between the national accounts trade data, which is the basis of the World Bank trade forecasts, and the balance of payments trade data. The difference is largely related to the valuation of imports of goods; goods imports under the balance of payments were USD 9.1 billion higher over Q1 to Q3 2010 than under the national accounts. 4. Domestic financial markets have been boosted by the capital inflows The surge in capital The surge in capital inflows over 2010 has prompted a wide-ranging policy debate within inflows has prompted a emerging economies. The appropriate response depends on the nature of the flows, range of policy proposals country circumstances and the extent of various macroeconomic and prudential concerns to address concerns over and vulnerabilities to a reversal of flows. These issues are discussed in more detail in vulnerability to outflows and the impact of further Part B. THE WORLD BANK | BANK DUNIA December 2010 4 Indonesia Economic Quarterly Maximizing opportunities, managing risks exchange rate Over the course of 2010, Bank Indonesia (BI) has been pursuing a range of prudential appreciation 1 regulatory policy measures to shift flows towards less volatile short-term funds. In June a 1-month minimum holding period for BI certificates (SBIs) was announced, applying to both resident and non-resident investors. The 1-month and more recently 3-month auctions of these certificates, which tend to be held by shorter-term investors, have also been suspended. In December BI's monetary policy decision indicated that it is preparing further measures to "mitigate the negative impact of capital inflows as well as to strengthen banking system resilience". These relate in part to the regulation on foreign currency statutory reserves and vostro accounts (rupiah demand deposit accounts held by non-residents in domestic banks). The trend in portfolio capital inflows was however reversed in November, although initial data for December suggest a continuation of inflows. Non-resident investor portfolio outflows of around IDR 18 trillion were seen in November, about 80 percent of which were due to a decline in holdings of Bank Indonesia certificates (SBIs). This followed the suspension in mid November of 3-month SBI sales. In addition these outflows were seen during increased international financial market concern over the Irish debt crisis. Data for December-to-date indicate a return to net portfolio inflows and a rise in non-resident holdings of government securities. Domestic bond and Looking over the course of 2010, equities and bond prices continue to reach record highs. equity prices have The Jakarta composite equity index has gained 40 percent since the start of 2010, benefited from the capital compared with a 5.6 percent rise in the local currency MSCI World index, and is up 190 inflows... percent on the lows of March 2009. Local currency sovereign yields are at their lowest levels ever. One-, five- and ten-year yields are down approximately 180 to 230 basis points over the year-to-date. The spread of Indonesian USD sovereign bonds over US treasuries has returned to pre-crisis 2007 lows, under 200 basis points, and over 100 basis points below the global Emerging Market Bond Index spread. In addition to improvements in market indicators of creditworthiness, Moody's rating agency announced that it was putting Indonesia's sovereign rating on upgrade watch (Box 1). Box 1: Moody's puts Indonesian government bonds on review for ratings upgrade On December 1, 2010 Moody's put Table 4: Indonesia's CDS spreads are well below Indonesia's foreign and local several investment-grade sovereigns... currency government bonds on review for a possible ratings Ratings upgrade, which would move them CDS spreads from Ba2 to investment grade. (Nov 30 2010) Moody's S&P Previously in June this year, Moody's had shifted the outlook for Indonesia 147 Ba2 BB Indonesia's sovereign rating from stable to positive. Indeed, market Thailand 105 Baa1 BBB+ indicators currently put Indonesia's Malaysia 85 A3 A- creditworthiness at comparable, or higher, levels than other investment Korea 110 A1 A grade sovereigns (Table 4). Greece 973 Ba1 BB+ The main reasons cited for Moody's Portugal 532 A1 A- December decision included Indonesia's resilience to the global Ireland 608 Aa2 A financial crisis and continued strong macroeconomic fundamentals, the Spain 343 Aa1 AA steady improvement in the Brazil 119 Baa3 BBB- government's debt position, and the increase in foreign currency Belgium 183 Aa1 AA+ reserves that could provide a Italy 244 Aa2 A+ cushion against balance of payments shocks. Sources: Thomson Financial Datastream, Moody's and S&P Note: 5-year US dollar sovereign CDS spreads 1 For more details on Bank Indonesia's policy responses see Nanang Hendarsah (2010), `Challenges and Policy Options in Managing Portfolio Investment Flows: Bank Indonesia's Recent Experiences', Directorate of Economic Research and Policy, Bank Indonesia, November. THE WORLD BANK | BANK DUNIA December 2010 5 Indonesia Economic Quarterly Maximizing opportunities, managing risks As with other Asian credits, Indonesia was relatively unaffected by the recent Irish debt crisis in the Eurozone (Figure 6). Indeed, Indonesia's falling public debt levels and solid fiscal balances stand out in comparison to many OECD countries, especially those in Europe which have faced major public debt crises this year. From over 100 percent in 1999, Indonesia's public debt to GDP ratio dropped by an average 7 percentage points each year to reach 28 percent in 2009 (Figure 7). Reserves have also been moving upwards, as discussed above. Figure 6: ...including Italy and Belgium Figure 7: Indonesia's public debt has fallen (sovereign 5-year US dollar CDS spreads in basis and reserves are rising points) (public debt-to-GDP, percent; reserves, USD billion ) Basis points Basis points Percent USD billion 1400 1400 120 120 1200 1200 Indonesia Greece 100 100 Public Debt to GDP 1000 1000 (LHS) 80 80 Foreign 800 800 Reserves (RHS) 60 60 600 600 Ireland 40 40 400 400 200 200 20 20 Italy Belgium 0 0 0 0 Mar-08 Nov-08 Jul-09 Mar-10 Nov-10 1998 2000 2002 2004 2006 2008 2010 Source: Thomson Financial Datastream Sources: BI, CEIC and World Bank (WB) Note: 2010 reserves are until end-November and public debt-to-GDP is WB estimate ... but intervention has The Rupiah exchange rate has remained stable in recent months (and has appreciated by limited the movement of 4 percent in the year-to-date). Daily volatility has been low. The nominal effective the exchange rate exchange rate (i.e. Indonesia's bilateral exchange rate with different countries weighted by their importance in Indonesia's trade) actually depreciated by 2.9 percent from August to November (up 2.7 percent on December 2009). The real effective exchange rate, i.e. also incorporating differences in relative prices across countries, has also depreciated from August to November (down 2.5 percent) but is up 5 percent since December 2010. Intervention by BI in the foreign exchange market has seen reserves rise from USD 81 billion at end-August to USD 93 billion at end-November (although the rate of accumulation dropped in November). However, due to the sterilization of reserve accumulation, monetary growth rates have not picked up markedly (Figure 8). The pattern of sterilization by open market operations in recent months has relied increasingly on term deposit facilities and the overnight BI Deposits Facility (FASBI) rather than SBI issuance. The stock of outstanding SBIs has declined, as BI adapts its operations to shift funds away from short-term SBI paper (which is the more volatile of portfolio inflows). Credit conditions On the quantity side, credit growth has been driven by working capital loans. Overall credit continue to appear growth rose to 21 percent yoy in September, as growth in loans for working capital supportive of future continue to rebound (Figure 9). Consumer loans, which account for one-third of total investment and growth loans, grew at 25 percent yoy. Loan approvals (albeit reported with a lag) are also up. In terms of the cost of credit, nominal lending rates have tracked down over the year (down 100 basis points to 13.4 percent in September). This follows the decline in sovereign yields highlighted above. Measured on an ex-post basis, real loan rates are approximately 7 percent with deposit rates almost zero. Banking sector balance sheet indicators, such as capital adequacy ratios, non-performing loans and loan-to deposit ratios, remain relatively robust, and are broadly unchanged since the previous IEQ. In related news, Indonesia's Parliament has given preliminary THE WORLD BANK | BANK DUNIA December 2010 6 Indonesia Economic Quarterly Maximizing opportunities, managing risks approval for the creation of a new financial regulator, which will be responsible for monitoring banks, brokers and fund management companies and will take over regulatory functions currently residing with Bank Indonesia and Bapepam (the Capital Market and Financial Institution Supervisory Agency). Figure 8: Sterilization of reserve accumulation continues Figure 9: Credit growth has been driven by working capital (base money and open market operations, OMOs, outstanding loans IDR trillion; reserves, USD billion) (M1 and M2 growth in year-on-year percentage change) IDR trillion USD billion Percent YOY Percent 500 100 50 18 Total Reserves (RHS) Investment Loan Lending Rate M0 Base Money Growth (LHS) (RHS) (LHS) 40 15 400 80 30 12 300 60 20 9 Consumer Loan 200 40 Growth (LHS) Total stock of OMOs to 10 6 reduce net domestic assets Total Loan (LHS) Growth (LHS) 100 20 0 3 Working Capital Loan Growth (LHS) -10 0 0 0 Jan-07 Mar-08 Jun-09 Sep-10 Jan-08 Dec-08 Nov-09 Oct-10 Source: BI, CEIC and World Bank Source: BI, CEIC and World Bank 5. Food price shocks again dominate recent movements in inflation Movements in volatile Weather-related disruptions to food prices lifted headline CPI inflation to 6.3 percent yoy food prices continue to in November, up from 5.7 percent in October (Figure 10). In particular, grain prices (which drive headline inflation include rice) were up 25 percent yoy, the highest rate since the food crisis in 2006. These price increases hit the poor disproportionately given the weight of such food items in their consumption bundles. The wedge between the World Bank's poverty basket inflation, which puts greater weight on such food items, and overall CPI inflation has increased above 5 percentage points ­ the largest gap since the series began in 2002. Domestic rice prices remain around 50 percent higher than the comparable international rice prices (see Box 1 in the September IEQ for further analysis). The Government also announced a series of purchases of rice on the international market to build stocks at the State Procurement Agency (BULOG). Core inflation, although Core inflation remains subdued (at 4.3 percent yoy in November). While gradually ticking up gradually, increasing, it still remains well below levels seen, for example, in 2008. Reflecting the remains relatively contribution of volatile items (Figure 11), such as food prices, to recent inflation numbers, subdued and judging core inflation numbers to be manageable, BI maintained its policy rate at 6.5 percent in December. The divergence between The growth in economy-wide prices, as measured by the GDP deflator, is converging CPI and GDP deflator towards that of the CPI. As highlighted below, this has implications for comparing World inflation is narrowing Bank and the Government's fiscal balance projections as the two indices form the different price bases for tax revenue forecasts. In Q3, GDP deflator growth was 7.1 percent yoy, which is only 0.9 percentage points above quarterly CPI inflation. Falling investment and construction price inflation have played a role in this convergence (just as their rise contributed to the gap between the two inflation rates reaching 10 percentage points in Q2 2008). THE WORLD BANK | BANK DUNIA December 2010 7 Indonesia Economic Quarterly Maximizing opportunities, managing risks Figure 10: Inflation has risen over the year but remains Figure 11: Core inflation has increased only steadily while below historic averages volatile prices (mainly food) have driven headline inflation (year-on-year percentage change) (contributions to monthly inflation) Per cent Per cent Per cent Per cent 24 24 1.8 1.8 Volatile Administered Core Headline Inflation 18 18 1.2 1.2 Food inflation 12 12 0.6 0.6 Poverty Basket Inflation 6 6 0.0 0.0 Headline Inflation 0 0 -0.6 -0.6 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 Nov-08 May-09 Nov-09 May-10 Nov-10 Sources: BPS and World Bank Sources: BPS and World Bank Looking forward there is The forecast for average inflation in 2010 remains unchanged at 5.1 percent. The forecast a balance of upside and for inflation in Q4 has been revised down slightly to 6.2 percent yoy from 6.4 percent, due downside pressures, both to the weaker forecast for Q4 GDP growth. The upward revisions to poverty basket domestic and external, on inflation forecast reflect the recent supply shocks to food prices and rising global inflation commodity prices. For 2011, upside pressures to prices come from global commodities and potential further supply shocks to food prices. However, neither inflation expectations nor core inflation have picked up markedly in recent months. Major trading partner growth has been revised downwards. Inflation in 2011 Q4 is projected at 6.0 percent yoy. These forecasts do not incorporate any assumed adjustments in administered prices or subsidies in 2011. The outlook for GDP deflator growth has also been downgraded slightly for 2010 and 2011 in line with recent trends. This feeds into a downward revision for nominal GDP, which is key to the fiscal forecasts on the revenue side. 6. Weakness in fiscal expenditures continues and tax revenue growth has slowed Tax revenue growth in Government revenue growth has slowed since the September IEQ, due to both income 2010 has slowed tax and VAT performance. Total central government revenues in the first eleven months of 2010 were 18 per cent above the equivalent period in 2009. In contrast, revenues in the first eight months, i.e. at the time that the September IEQ projection was made, were 21 per cent up on the previous year. Both economic activity and policy measures play a role in explaining this trend. First, the growth in nominal economic activity was lower than previously expected. This has lowered 2010 projections for both tax and oil and gas non-tax revenues (with the latter also down on a slightly lower oil price projection). Second, the reduction of the corporate income tax rate in 2010, from 28 percent in 2009 to 25 percent in 2010, may also explain some of the weakness. Policy changes will also affect tax growth in 2011. For example, duties on land and building transfer will no longer be recognized as central government revenue but as regional government revenue. Similarly, from 2011 land and building tax revenues are planned to be progressively devolved from the central government, before they are completely phased out by 2014. Weak disbursement rates As in previous years, weak disbursement has also been seen through the first eleven remain an issue, although months of 2010. As of end-November, total disbursement was only 73 percent of the measures to improve revised Budget, below the levels of 76 percent in 2009 and 83 percent in 2008. This was budget execution have driven mainly by low expenditures on items under capital and others categories, but also been introduced on materials and interest payments. As a result, the World Bank's expenditure projections THE WORLD BANK | BANK DUNIA December 2010 8 Indonesia Economic Quarterly Maximizing opportunities, managing risks for 2010 have been revised down slightly. Even though reforms to improve budget execution have been introduced, some long-standing issues constraining timely budget disbursement still persist. Part B examines in more detail recent trends in disbursement rates, their potential impact on the efficiency of public expenditures and associated policy reforms. The fiscal deficit in 2010 In light of these trends, the deficit in 2010 is likely to be well below the revised Budget is forecast to be lower projection of 2.1 percent of GDP or IDR 134 trillion. The Government's Semester I Report than projected in the already revised down the fiscal deficit projection to 1.5 per cent of GDP or IDR 95.1 approved Budget trillion. As of November, the government balance for 2010 to date was still running a surplus of IDR 16 trillion. Although, as mentioned above, expenditures are back-loaded into the final months of the year, the performance-to-date contributes to a World Bank projection of a deficit of IDR 69.1 trillion or 1.1 percent of GDP in 2010 (Table 5). This is up by IDR 9.9 trillion (0.2 percentage points of GDP) on the September IEQ projection. The main driver of the difference between the Government and World Bank fiscal projections is the different price indices used for forecasting nominal GDP and hence tax revenues (see June 2010 IEQ for more details). The Government uses the CPI, while the World Bank uses the GDP deflator to reflect the economy-wide base for tax revenues. As growth in the two price indices moves closer together, the divergence in revenue forecasts is likely to be narrowed. The 2011 Budget was The programs and priorities in the 2011 Budget approved by Parliament are generally in approved in late October line with the proposed budget. Overall spending increased by 2.3 percent compared with the proposed budget, up 6.7 percent on the 2010 Budget. The assumptions for growth and the strength of the nominal exchange rate against the USD were adjusted upwards slightly. The deficit was increased to 1.8 percent of GDP, compared to 1.7 percent in the proposed Budget. The 2011 Budget involves a substantial increase in the allocation of funds to capital expenditures (up almost 30 percent on the 2010 Revised Budget). On subsidies, the proposal to increase electricity tariffs by 15 percent was dropped by Parliament. Instead, Parliament suggested the Government improve the efficiency of PLN's (the state electricity company) operation. The Government has recently indicated that it is proposing to limit the use of subsidized gasoline by private vehicles starting in January 2011. In other related news on subsidies, the Ministry of Agriculture is conducting a trial for direct fertilizer subsidies to farmers rather than to fertilizer producers. Capital inflows are The fiscal financing position in 2010 has been aided by strong demand from non-resident supportive of the investors for government securities (SUNs). Net financing in the year to end-November Government's financing reached IDR 78 trillion with net domestic bond sales contributing IDR 93.5 trillion to this position going forward total (and negative net foreign financing to date). The 2011 Budget projects net financing from domestic sources of IDR 125.3 trillion (covering almost all of the IDR 124.7 trillion total net financing required for the projected deficit). Again, domestic net bond sales contribute the main share at IDR 121.6 trillion. A continuation of strong non-resident portfolio demand for SUNs into early 2011 is supportive of the financing position for the year. THE WORLD BANK | BANK DUNIA December 2010 9 Indonesia Economic Quarterly Maximizing opportunities, managing risks Table 5: The approved 2011 Budget projects a higher deficit than currently projected for 2010 (IDR trillion, unless otherwise indicated) 2009 2010 2010 (p) 2010 (p) 2011 (p) Revised Semester 1 WB Actual Budget Budget report estimates A. State revenues and grants 848.8 992.4 994.7 968.4 1,104.9 1. Tax revenues 619.9 743.3 738.9 708.9 850.3 o/w natural resources 317.6 362.2 360.9 349.4 420.5 - Oil and gas 50.0 55.4 55.3 52.2 55.6 - Non oil and gas 267.5 306.8 305.6 297.2 364.9 2. Non tax revenues 227.2 247.2 253.9 257.5 250.9 o/w natural resources 139.0 164.7 164.7 157.3 163.1 - Oil and gas 125.8 151.7 151.5 141.2 149.3 - Non oil and gas 12.8 13.0 13.2 16.2 13.8 B. Expenditure 937.4 1,126.1 1,089.8 1,037.5 1,229.6 1. Central government 628.8 781.5 742.4 694.6 836.6 2. Transfers to the regions 308.6 344.6 347.4 342.9 393.0 C. Primary balance 5.2 -28.1 5.7 26.0 -9.4 D. SURPLUS / DEFICIT (88.6) (133.7) (95.1) (69.1) (124.7) Deficit (per cent of GDP) (1.6) (2.1) (1.5) (1.1) (1.8) Economic assumptions/outcomes Gross domestic product (GDP) 5,613 6,254 6,254 6,385 7,020 Economic growth (per cent) 4.5 5.8 5.8 5.9 6.4 CPI (per cent) 2.8 5.3 5.3 5.1 5.3 Exchange rate (IDR/USD) 10,408 9,200 9,200 9,080 9,250 Interest rate of SBI (average %) 6.6 6.5 6.5 6.4 6.5 Crude oil price (USD/barrel) 61.5 80.0 80.0 76.6 80.0 Oil production ('000 barrels/day) 950 965 965 965 970 Note: World Bank revenue forecasts are based on a different methodology to the Government to derive projections for nominal GDP (see Part C of the June 2010 IEQ for a full discussion Source: MoF and World Bank projections 7. Near-term risks are predominantly external, but domestic policies will determine the medium-term growth trajectory Near-term risks are The global drivers of Indonesia's external position bring both risks and opportunities. The mainly external, outlook for the drivers of global liquidity and commodity prices, which have recently particularly relating to boosted Indonesia's external balance, remain susceptible to sudden dislocations. Recent capital inflows commodity price rises have (For further discussion of the impact of commodity price shocks to Indonesia's fiscal position, prices and exports see Part B of the June 2010 IEQ). In relation to capital flows a strong upward revision to the US recovery trajectory, and the consequent adjustment in the QE2 (quantitative easing) policy, could cause a temporary shock to flows to emerging market economies (EMEs). Furthermore, the policy response to exchange rate pressures and capital flows amongst emerging economies is not well coordinated. This can lead to the potential for regulatory arbitrage, with "hot-money" investors switching focus as countries adopt different regulations and policies towards such flows. Set against this, structural factors, such as rebuilding of corporate and household balance sheets in the G7 and high savings in China, combined with the adjustment of relative risk of EMEs versus highly indebted high income economies, point to continuing liquidity flows to EMEs. THE WORLD BANK | BANK DUNIA December 2010 10 Indonesia Economic Quarterly Maximizing opportunities, managing risks In the short-term, Indonesia still remains vulnerable to adverse shocks to investor sentiment. For instance, the Indonesian economy experienced capital flight in May 2010. Market contacts suggest that this vulnerability is diminished for non-resident investors in longer-term government securities. Nevertheless, policies to enhance the incentives for FDI investments can help not only to shift flows towards more stable investments but also to help finance the needed boost in investment in Indonesia is to meet is growth targets. Domestic risks mainly Domestically, in the near-term, while the recent uptick in core inflation has been limited, concern the medium-term there is the potential upside risk of further food price shocks feeding into core inflation via policy challenges second round effects and their impact on inflation expectations. On the fiscal side, for required to boost growth 2011 a primary risk remains the timely disbursement of funds, particularly on capital to an even higher trajectory infrastructure projects. For the medium-term outlook, the main challenge is whether the policies required to boost growth to the 7 percent plus growth rates that are possible are adopted and implemented. This risk provides both upside and downside potential around the baseline outlook. In particular, coordinated action will be required to address Indonesia's infrastructure needs, to address the investment climate constraints on growth, to enhance the creation of quality employment, and to ensure that the benefits of this growth are shared across the population. THE WORLD BANK | BANK DUNIA December 2010 11 Indonesia Economic Quarterly Maximizing opportunities, managing risks B. SOME RECENT DEVELOPMENTS IN INDONESIA'S ECONOMY 1. Managing capital inflows: Policy options for Indonesia a. Capital inflows have been on the rise in Indonesia this year, bringing benefits but also risks that necessitate an appropriate policy response Monetary stimulus in The question of how best to manage growing capital inflows has become an increasingly OECD countries together pressing policy issue over the past 18 months in Indonesia and other emerging markets. with high yields and Strong economic growth and macroeconomic fundamentals in emerging economies, strong economic growth together with relatively high yields, are drawing in capital from advanced economies in emerging economies will likely sustain capital where growth remains weak and yields low. In the near-term, the second round of inflows in the near and quantitative easing starting in the US provides further support for global liquidity and medium-term, bringing inflows to emerging markets, such as Indonesia, are likely to continue. In the medium- both benefits and risks to term, even after monetary stimulus is gradually withdrawn in OECD countries, growth receiving countries differentials are likely to endure as will the secular rebalancing of real money portfolios towards emerging economies, supporting the outlook for inflows. While capital inflows can significantly reduce the cost of borrowing and increase the availability of financing in receiving countries, large and volatile flows can also raise macroeconomic and prudential concerns and heighten the risk of future disruptive outflows. The balance of these risks and benefits depends crucially on the composition of flows, in particular longer-term foreign direct investment (FDI) versus shorter-term portfolio flows, and the appropriateness of the policy response. The following sections outline the composition of recent capital inflows into Indonesia, associated risks, and potential medium-term and short-term policy responses. Indonesia has seen net In the first three quarters of 2010, Indonesia's financial and capital account net inflows inflows far exceed pre- rose to USD 15.7 billion, moving well above pre-crisis average levels. Net portfolio inflows crisis levels this year, of USD 13.3 billion accounted for the vast majority of inflows, followed by net FDI inflows dominated by portfolio of USD 6.8 billion. By comparison, net portfolio inflows in all of 2007 amounted to USD flows but also rising FDI 7 billion, and to USD 4 billion on average from 2004-2006. Other, mainly banking flows, showed a net outflow of USD 4.4 billion (Figure 12). Within portfolio flows, foreign purchases of local currency government bonds (SUNs) comprised 73 percent of the net inflows in the year-to-November, with net purchases of short-term money market instruments (SBIs) and equities contributing 12 percent and 15 percent, respectively (Figure 13). In November, there was some adjustment relative to trend, with net non-resident portfolio outflows, mostly of SBIs. The 3-month SBI auction was suspended during the month and international financial market concerns over the Eurozone debt crisis mounted. The latest data for December indicates inflows returning into government securities and portfolio equities. While net FDI inflows this year have also topped 2007 and 2008 full year totals (USD 2.2 billion and USD 3.4 billion, respectively), they remain lower in absolute, and relative to GDP, than for many regional peers. Portfolio inflows are still the dominant driving force of the financial and capital account surplus. Given the expected narrowing of the current account next year, this heavy reliance of external financing on portfolio inflows, rather than longer-term FDI, remains a source of macroeconomic vulnerability. Net inflows to GDP in Although net inflows to GDP are in the range of historical patterns (albeit rising) and do Indonesia are not not stand out versus comparators, Indonesia's net portfolio inflows to reserves are exceptional, but inflows relatively high (at 16 percent year-to-date compared with 3-4 percent in Thailand and to reserves are relatively Brazil). The level of foreign reserves deserves particular attention in Indonesia since non- high residents own a relatively high share of financial assets, and therefore reserves could play a critical stabilizing role if there were a sudden sell off and large-scale outflows. THE WORLD BANK | BANK DUNIA December 2010 12 Indonesia Economic Quarterly Maximizing opportunities, managing risks Figure 12: The rise in net portfolio inflows has dominated Figure 13: ...with a majority of non-resident portfolio inflows the financial account since 2009... going into domestic government securities (SUNs) (non-resident investor net purchases of equities, SUNs and (net financial account flows, in USD billion) SBIs in IDR trillion; reserves in USD billion) USD billion USD billion IDR trillion USD billion 25 25 60 105 Net Other Investment Foreign Reserves 20 Net Portfolio Investment 20 (RHS) 40 90 15 Net FDI Investment 15 Financial Account 10 10 20 75 5 5 0 60 0 0 -5 -5 -20 Net non-resident investor 45 -10 -10 purchases (LHS): -40 30 SBI JCI SUN -15 -15 -60 15 2006 2007 2008 2009 2010 Q1-Q3 Nov-08 May-09 Nov-09 May-10 Nov-10 Sources: BI Sources: CEIC, BI and MoF b. Rising portfolio inflows raise macroeconomic and prudential concerns and heighten the risk of disruptive outflows Currency appreciation as A key macroeconomic policy challenge presented by large capital inflows is the potential a consequence of capital appreciation of the exchange rate. As non-resident investors are buying local assets, this inflows can impact puts upward pressure on the local currency. To the degree that appreciation has a competitiveness and deleterious effect on exports and competitiveness, it can be damaging for certain sectors export performance of the economy. The Rupiah has seen a 24 percent appreciation in nominal and real terms since March 2009. From January to November 2010, the currency has strengthened by 2 percent in real terms and 4 percent nominally (Figure 14). Inflows have also helped Capital inflows can also contribute to asset price bubbles and greater volatility in financial drive up prices in the markets. In Indonesia, although property prices do not appear to have risen much since equity and fixed income early 2009, equity and fixed income prices have. Local equities are up over 40 percent markets, reducing the year-to-date or 190 percent since March 2009. Local currency government bond yields Government's cost of borrowing on the one are at historic lows, with 10 year yields dropping by 280 basis points since January (from hand, but making the 9.9 to 7.1 percent) and 5 years falling by 230 basis points (from 8.8 to 6.5 percent). The system more vulnerable small size of domestic capital markets means that this is unlikely to have much of an to a sudden reversal of impact on the wider economy, for example, in terms of wealth effects on consumption. flows due to high foreign While the drop in yields represents a big reduction in the government's cost of borrowing, ownership on the other the high proportion of foreign ownership of government securities and equities makes the system more vulnerable to a sudden reversal of flows. At end-September 2010, non- residents owned 67 percent of the value of equity shares (around USD 126 billion), 28 percent of SUNs (over USD 20 billion) and 26 percent of SBIs outstanding (USD 7 billion). Indonesia's open capital The risk of a sudden reversal of capital flows is particularly relevant given Indonesia's account increases its open capital markets. If there was a sudden surge of capital out of the country, it would vulnerability to disruptive put downward pressure on the exchange rate (heightening the repayment cost of foreign outflows, but reserves currency denominated debt), as well as leading to higher yields and costs of borrowing. have risen proportionately with Figure 15 compares Indonesia's exposure to foreign ownership of financial assets and recent inflows and short- short-term external debt in September 2008, May 2010 and September 2010.2 term external debt has remained stable The value of foreign holdings of bonds has doubled since September 2008, and the value of foreign equity holdings has gone up by 60 percent (although the latter is largely due to record high equity valuations). However, the increase in short-term external debt has been 2 It is important to point out that the different indicators of this chart measure different types of vulnerability: for example, short-term external debt levels serve to indicate how well reserves could cover fixed amortization requirements if foreign capital markets closed down. On the other hand, the value of foreign equity holdings indicates possible outflows if there was a sudden selloff, although this value would adjust downwards as selling would lead to lower price levels. THE WORLD BANK | BANK DUNIA December 2010 13 Indonesia Economic Quarterly Maximizing opportunities, managing risks much more muted. Total debt rose by 20 percent over the period, and private short-term external debt by less than 7 percent. Moreover, while capital inflows can lead to maturity and currency mismatches, there appears to be little evidence of this happening so far. Foreign reserves have also increased by over 50 percent over the period to reach USD 93 billion (equivalent to approximately 6.7 months of imports and 2.4 times short-term external debt). Nevertheless, Indonesia's heightened financial exposure to capital outflows suggests that a higher level of reserves akin to regional peers might be desirable. Figure 14: The Rupiah saw a marked appreciation in nominal Figure 15: Foreign ownership of domestic assets has and real terms in 2009, but more gradual in 2010 increased, but so too have reserves (real effective exchange rate and nominal effective exchange (net capital inflows, foreign holdings of bonds and stocks, rate indexed to 100 in Jan 2002; IDR per USD level) short-term external debt and reserves, in USD billion ) Jan 2002=100 IDR per USD 400 0 Foreign Holdings Sept 2008 of SBI 350 2000 May 2010 IDR Appreciation Foreign Holdings Sept 2010 300 4000 of Bonds 250 6000 Foreign Holdings IDR/USD of Stocks Spot 200 8000 (RHS) Private Short-Term External Debt 150 REER 10000 (LHS) Total Short-Term 100 12000 External Debt NEER 50 14000 FX Reserves (LHS) USD bn 0 16000 0 20 40 60 80 100 120 140 Jan-96 Jun-98 Dec-00 Jun-03 Dec-05 Jun-08 Nov-10 Sources: CEIC, JPMorgan and World Bank Source: BI, MoF and World Bank c. Medium-term policies should aim to attract more FDI and strengthen the financial system through macro-prudential regulations With inflows likely to As highlighted above, capital inflows into Indonesia are likely to be more than a short-term continue, policies to phenomenon. In addition to immediate policy responses, there are measures that the attract longer-term FDI authorities could take to maximize the benefits and minimize the risks from inflows over inflows and strengthen the medium-term. The two main medium-term policy priorities should be to increase the financial system could help maximize longer-term FDI inflows and strengthen the financial system through macro-prudential and benefits and contain risks institutional measures to reduce vulnerability. Improving the investment In order to sustain growth rates of over 7 percent, Indonesia would have to raise its climate would help foster investment levels significantly. This will likely require foreign financing, as domestic beneficial FDI inflows savings are unlikely to cover the investment gap. FDI inflows are generally more resilient and longer-term than portfolio flows, and could be a useful source of financing to fill this gap. FDI flows to Indonesia are currently relatively low as a share of GDP, but the country could attract more of these flows by taking various measures to improve the investment climate. Steps could be taken to lower entry barriers and operating costs, improve logistics, revise labor legislation and control the proliferation of non-tariff barriers. Addressing Indonesia's infrastructure weaknesses would also be an important aspect to promote foreign and domestic investment. Macro- and micro- level Capital inflows can also fuel rapid credit expansion, asset price bubbles and trigger prudential regulations related financial sector vulnerabilities. In order to curb some of these vulnerabilities, could help strengthen the Indonesia could further strengthen its financial system through various micro- and macro- financial system level prudential regulations. At a macro-level, measures could be taken to address weaknesses in the legal, institutional and governance frameworks, establish a new financial supervisory framework, strengthen BI's balance sheet, and develop capital markets to diversify funding sources. At a micro-level, regulations could be put in place to reduce the financial vulnerability of banks, for example, by strengthening loan-loss provisioning or limiting foreign currency exposures, particularly short-term. THE WORLD BANK | BANK DUNIA December 2010 14 Indonesia Economic Quarterly Maximizing opportunities, managing risks d. Indonesia has various short-term policy options, of which gradual appreciation and the sterilized accumulation of reserves may be the two most appropriate Short-term policy options Depending on country circumstances, the short-term policy responses to capital inflows should be tailored to range from appreciation and reserve accumulation (sterilized and unsterilized) through to country circumstances reducing interest rates or tightening fiscal policy and imposing controls on capital inflows and outflows. Each of these policies comes with its own set of pros and cons. Currency appreciation In the absence of central bank intervention, currency appreciation is a direct consequence raises competitiveness of capital inflows. Appreciation has the advantages of increasing the purchasing power of concerns but can also domestic consumers, reducing inflation, making imports cheaper, and reducing the local have its benefits currency burden of foreign currency-denominated debt. On the other hand, appreciation heightens competitiveness pressures on exporters and import-competing sectors. The resulting sectoral reallocations may have social consequences depending on how the adjustment process is managed. However, such competitiveness pressures can stimulate necessary improvements in productivity, and unless the currency is severely overvalued, which according to the IMF's latest Article IV report does not seem to be Indonesia's case, allowing additional appreciation can be a good option, albeit at a gradual pace. Exchange rate In order to prevent appreciation or slow its pace in the face of inflows the central bank can appreciation can be offset accumulate reserves (by buying foreign currency and selling local currency back into the or slowed by central bank market). Building reserves may be a good option for Indonesia given its continued accumulation of foreign relatively high vulnerability to outflows of foreign investments. However, if the extra reserves liquidity is left in the market (unsterilized), it can increase inflationary pressures. The central bank can sterilize the extra liquidity through open market operations (OMOs) or other tightening measures such as increasing reserve requirements. Over the past year, BI has intervened to prevent an overly rapid appreciation of the Rupiah, especially in recent months. This is evident from the significant build-up in foreign reserves, from USD 66 billion at the beginning of January 2010 to USD 93 billion at end- November. BI has sterilized part of its intervention through OMOs, including issuance of SBIs and, increasingly, term deposits. However, increased SBI issuance raises quasi- fiscal costs for the central bank due to the interest rate differential between BI's payments on SBIs and earnings on reserves. In September, BI chose a different approach to reduce liquidity in the market and raised the statutory reserve requirement from 5 percent to 8 percent, an action that will drain approximately IDR 53 trillion from the system. Given recent pressures on BI's balance sheet and the quasi-fiscal costs of sterilizing through OMOs, liquidity tightening measures such as September's reserve requirement hike may be more suitable in the immediate future. Monetary and fiscal Monetary and fiscal policy can also be adjusted in response to inflows. Lowering interest policy can also be used if rates reduces the incentives for inflows but, given inflationary pressures, does not appear circumstances are to be a viable option for Indonesia at this stage. Fiscal tightening can help counter inflows conducive via lowering interest rates by reducing aggregate demand. However, Indonesia currently has a relatively conservative fiscal stance and tightening would adversely impact important development spending on infrastructure, health and education. If other options are not If other options are not possible, capital controls can be used to limit large and sudden feasible, tailored, short-term inflows or outflows, but good governance and adequate administrative capacity temporary and targeted are important preconditions to administer these effectively. Controls are a short-term capital controls may be solution because if inflows continue, investors often find ways to circumvent them. They appropriate but require good governance and can also be administratively costly to implement and introduce unfair competition in the administrative capacity access to foreign funds (with small and medium size enterprises losing out). Finally, the imposition of controls can create uncertainty regarding a country's policy stance, potentially leading to sudden capital reversals. Examples of controls include a tax on portfolio inflows, a ban on non-resident purchases of certain financial instruments, and a minimum holding period for certain types of investments. Several emerging economies around the world have issued various types of capital controls to stem inflows in the past year. BI's approach to date has focused instead on prudential regulatory measures to shift flows away from short-term instruments, particularly SBIs. This includes the 28 day minimum holding period for investments in SBIs announced in June. Issuance of 1 and 3 month SBIs has also been suspended in favor of 6 and 9 month paper. THE WORLD BANK | BANK DUNIA December 2010 15 Indonesia Economic Quarterly Maximizing opportunities, managing risks 2. Quality of public spending and disbursement profile in Indonesia a. Improving the quality of public spending is a key priority for the Government Improving the quality of The Government of Indonesia has outlined its commitment in its medium term public spending is a key development plan (RPJMN 2010-2014) to increase significantly infrastructure spending priority for the as well as to continue social and poverty reduction programs. Ambitious development Government, particularly targets have been set to be achieved by 2014, including building 1,900 kilometers of toll overall absorptive capacity and timely roads, connecting more households to the electricity grid, and reducing poverty levels to budget execution 8-10 percent. However, experience indicates that absorptive capacity (i.e. ability to spend) and the disbursement of public spending remains a challenge. Further improvements in public financial and management (PFM) systems and institutions can help to ensure that planned spending is realized in an efficient and timely manner. Any assessment of the quality of overall public spending would include an evaluation of overall PFM processes and institutions. This section focuses on just one aspect, which is of particular note in Indonesia: budget execution. There are long-standing issues that have resulted in disbursements being under budget and heavily skewed towards the last quarter of the fiscal year. This raises concerns over the absorption capacity of funds, and the potential for inefficient or inappropriate spending. b. Budget execution is skewed towards the end of the fiscal year Budget spending patterns The execution of the Indonesian budget follows a pattern which is characterized by slow continue to be skewed and back-loaded disbursements. Spending is particularly slow at the start of the fiscal year towards the end of the (Q1); then expenditures accelerate after July and August when parliament finishes its year budget revision, followed by a spending rush in the final three months (Q4). Capital expenditures are especially skewed towards the final months of the year (Figure 16). In the past four years, roughly half of capital expenditures were seen in Q4. As a result, in many cases, overall expenditures for the year are frequently below the budget (Figure 17). Progress in speeding up Progress in speeding up the disbursement cycle on capital expenditures was seen in 2009 the disbursement cycle with spending less back-loaded than in other recent years. This improvement reflected was seen in 2009...... related policy measures and also the Government's commitment to realize the stimulus package. As discussed in more detail below, some long-standing issues impeding timely budget disbursement remain. Nevertheless, the experience during 2009 suggests that significant improvement in speeding up budget execution is possible and can be achieved with strong political commitment from all government agencies.. Figure 16: Capital expenditures are heavily skewed Figure 17: Spending frequently under-shoots Budget levels (monthly and cumulative actual capital spending as (percentage gap between actual spending and revised Budget) percentage of total actual) 100 100 20 20 2007 2008 43 2007 2008 2009 2010* 2009 2010* 80 80 10 10 Lines = cumulative Bars = monthly 60 60 0 0 40 40 -10 -10 20 20 -20 -20 0 0 Sources: Ministry of Finance, World Bank staff Sources: Ministry of Finance, World Bank staff Note: * 2010 full-year actual figure based on World Bank Note: * 2010 full-year actual figure based on World Bank staff estimates staff estimates ...but spending rates have However, disbursement rates in 2010 have been weak. In the year-to-November, only 73 slowed in 2010 percent of the revised Budget was spent. Capital and material expenditures were THE WORLD BANK | BANK DUNIA December 2010 16 Indonesia Economic Quarterly Maximizing opportunities, managing risks particularly low, at 50 percent and 64 percent, respectively. This compares with corresponding expenditures in the first eleven months of 2009 of 68 percent and 69 percent of their full year totals, respectively. c. International comparisons highlight Indonesia's budget execution challenges In comparison to its Indonesia's back-loaded budget disbursement profile stands out in comparison with other regional peers, countries within the region (Figure 18). In 2009, more than 20 percent of Indonesia's Indonesia's disbursement central government budget was realized in the last month of the fiscal year, and is likely to profiles are more back- be highly concentrated in December in 2010. In contrast, Thailand, Philippines, and, to loaded to the end of the fiscal year some extent India, showed a more equal distribution of disbursement across months. Figure 18: Indonesia's skewed disbursement profile stands out amongst regional peers (monthly fiscal actual expenditures as percentage of annual total) 25 25 Philippines (2009) Thailand (2008) India (2007) Indonesia (2009) 20 20 15 15 10 10 5 5 0 0 1 2 3 4 5 6 7 8 9 10 11 12 Month Sources: CEIC and World Bank Experience from other A full analysis of the PFM systems of the countries mentioned in Figure 18 is beyond the countries suggests that scope of this section. However, a preliminary review suggests that flexible rules for budget flexible virement virement, i.e. the administrative transfer of funds from one part of a budget to another, and procedures and provision providing more flexibility for line ministries' managers contribute to smoother disbursement of adequate flexibility to line ministry and agency profiles. However, moves toward more deconcentrated controls should be accompanied managers may improve by strengthened procedures for auditing and reporting. timely budget execution 3 These are some of the issues that Schiavo-Campo and Tommasi (1999) highlight as being generally needed to improve the efficiency of public spending, particularly budget execution. Other areas include the authorization of multi-year commitments and spending, at least for capital expenditures, but the procedures need to be closely regulated and combined with robust commitment controls. Market testing and outsourcing can also play a role, although caution is needed in contract preparation and management and ensuring competitive procurement for activities that are contracted out. Malaysia provides an example of granting flexibility to line mangers, while linking it to some agreement on goals and performance. Under the Modified Budgeting System, introduced in Malaysia in 1990, Controlling Officers are responsible for determining their department's performance in terms of outputs and impacts, which are recorded in the departmental program agreement.4 This records the inputs, outputs and impact of an activity as agreed between the Federal Treasury and the department during budget execution. To enable them to manage their resources more effectively, Controlling Officers have greater powers over their utilization, for example, the ability to transfer resources across activities within a particular program without prior approval from the Treasury. 3 Schiavo-Campo and Tommasi, 1999, "Managing Government Expenditure", Asian Development Bank. 4 From Tan Sri Dato' Seri Ahmad Sarji bin Abdul Hamid, Chief Secretary of the Government of Malaysia, "Improvements in the Public Service for the year 1992,1993" in Schiavo-Campo and Tommasi (ibid). THE WORLD BANK | BANK DUNIA December 2010 17 Indonesia Economic Quarterly Maximizing opportunities, managing risks d. Budget under-spending and a skewed disbursement profile can hinder the effectiveness and efficiency of public spending Slow and back-loaded The degree of underspending of annual budgets in Indonesia may be due to the disbursement profile and absorptive capacity of line ministries not keeping track with rising budget allocations. In unspent budget could certain cases unspent budget could also result from efficiency gains in some spending indicate low absorptive categories (i.e. it does not necessarily reflect low absorptive capacity). However, this capacity or bottlenecks in implementing public seems less likely in the case of Indonesia since there is an incentive for line agencies to investment... spend all of their budget within the fiscal year due to the strict annual budget system. Box 2 considers the budget allocation and spending within the Ministry of Health and potential indicators of absorptive capacity. Box 2: Allocation and spending for the Ministry of Health As part of its input toward the preparation of 2010 Financial Note, the Ministry of Health conducted a review on the implementation of policies and programs in the health sector between 2004 and 2009. The review provides a brief assessment of the progress in achieving health outcome targets, budget allocation, as well as budget realization of each program. Table 6 below provides a summary of the assessment. Although the actual spending was never fully realized, the Ministry of Health in most cases continued to receive significant budget increases. This could be driven by the pressing needs and relatively low level of current spending in the health sector. However, in 2008, the Ministry of Health was unable to meet targets for more than one-third of health target indicators. This may be associated with, among others, lack of absorption capacity, and allocative inefficiency. The above points suggest that increasing budget needs is to be done in parallel with improving the institution's capacity in planning and implementation to achieve their development goals. Table 6: Ministry of Health budget allocation and target performance 2005 2006 2007 2008 Budget Annual budget (IDR billion) 11,110 13,980 18,750 18,420 allocation and actual Percent increase on preceding year 89% 26% 34% -2% spending Budget realization (IDR billion) 8,260 12,270 15,210 15,880 As percent of budget 74% 88% 81% 86% Programs Number of programs 15 14 14 14 and target indicators Number of indicators, of which: 45 63 62 58 (outputs / outcomes) Above target 11 19 23 10 At target 14 28 20 22 Below target 20 16 19 26 Sources and notes: World Bank staff from Laporan Kementrian Kesehatan sebagai Bahan Penyusunan (i) Nota Keuangan dan RAPBN Tahun 2010, (ii) Laporan Pelaksanaan APBN Semester I Tahun 2009 dan Prognosa Semester II Tahun 2009, (iii) Nota Keuangan dan RAPBN-P Tahun 2009 ... and can lead to Skewed spending patterns can disrupt infrastructure investments and project distortions in public implementation. Infrastructure projects require multi-year financial planning and cash flow expenditure efficiency certainty throughout the year. Back-loaded annual disbursement disrupts cash and effectiveness management and planning and creates uncertainty in the implementation of the capital and hinder the attainment of development outcomes budget. In addition, while the cautious use of multi-year contracts is somewhat understandable -- given the focus on the annual budget cycle, the inability to carry-over funds between years and weaknesses in multi-year commitment planning and management -- this typically leads to a rush to deliver projects by year end, compromising quality.5 Moreover, rushed budget execution at the fiscal year end could 5 The introduction of a government-wide medium-term expenditure framework (MTEF) is expected to help reduce the budgetary risks associated with multi-year commitments, as budget holders will receive greater assurances about the availability of medium term resources. THE WORLD BANK | BANK DUNIA December 2010 18 Indonesia Economic Quarterly Maximizing opportunities, managing risks also lead to inappropriate use of public funds. Box 3 provides an illustration of the potential cost of implementation problems for the road and bridge sector. As mentioned above, low absorption capacity also means that some portions of the allocated budget for development programs are not spent. This can affect the achievement of development targets which have been set along with the budget. Finally, there is also an opportunity cost related to the unutilized funds, which could otherwise be used for high-return investments. Box 3: Enhancing internal control and supervision can improve quality of spending Each year, the Supreme Audit Body (Badan Pemeriksa Keuangan, BPK) carries out an audit on the implementation of central, provincial, and districts budget to assess selected programs or activity implementation. This Box focuses on the audit assessment of the implementation of road and bridge infrastructure. The audit covers the budget implementation of national, provincial, and district road and bridge in fiscal years 2007, 2008, and 2009. The review included implementing units within DG-Highway-Ministry of Public Work, 18 provincial highway offices, and 26 district highway offices. The total budget of the sample was IDR 6.9 trillion, or 12.6 per cent of the overall budget realization of IDR 55 trillion. The audit found that the value of the total budget that was likely to be inappropriately used or not used in an efficient and effective manner was around IDR 315 billion or 4.6 per cent of the sample's budget (Table 7). Table 7: Summary of BPK audit findings on the road sector No of Value Findings that cause the following: cases (IDR Billion) Financial loss to government (central and sub-national) 199 149.1 Potential financial loss 65 45.2 Revenue below target (central and sub-national) 42 25.1 Administration 89 n.a. Inefficiency 30 62.9 Ineffectiveness 26 32.7 Total 451 314.9 The assessment suggests that many cases related to potential financial loss were due to weaknesses in the control system. These include unfinished project implementation, not- completed work volumes, over payment (over price), as well as weak planning. The assessment also reported some inefficiencies and ineffectiveness in project implementation, mostly due to weakness in internal control and supervision. For example, the use of inputs with price, quantity or quality that is of higher than standard, quantity or quality that is beyond what is needed, and higher price compared to similar procurement at the same time. The assessment found that some projects did not provide any benefit or intended outcomes. For example, some spending was not well targeted or the utilization of goods and services not as planned, or the purchase of goods that are not or not yet being utilized. Other issues included the delay or blocking of activities hindering the attainment of organizational objectives, sub-optimal service delivery, or the improper function or tasks of the institution. Sources: World Bank staff from BPK Audit Report, 2009, available at www.bpk.go.id e. Impediments to disbursement and recent policy reforms The Government is taking The Government has taken several steps in recent years to improve budget execution. On steps to address budget procurement this includes a move in 2008 to allow procurement procedures to start as execution and early as October in the preceding year. However, this will have an even greater impact disbursement delays once resources are allocated to support this early procurement preparation process. The Ministry of Finance has also set new standards to reduce the time it takes to process payments, and introduced measures to improve cash management and planning In terms of the implementing units, the Government issued Presidential Regulation No. 53/2010 which states that the assignments and dismissals of implementing unit officials are no longer bound to the fiscal year. However, to be effective, new technical regulations also need to be issued by the Ministry of Finance. The Government has also issued a presidential regulation that gives greater flexibility for multi-year contracting and seasonal THE WORLD BANK | BANK DUNIA December 2010 19 Indonesia Economic Quarterly Maximizing opportunities, managing risks activities such as seed planting, reforestation, and provision of medicine. In addition, DG Treasury has issued a circular letter to form a permanent team at the level of ministerial and regional treasury units to monitor the Satker disbursement performance. Progress has also been made on the timely issuance of budget execution documents (DIPAs). Since 2007, DIPAs have been issued in early January (i.e. the beginning of the fiscal year). Previously, DIPAs could be delayed if the relevant parliamentary commission failed to complete its budgetary review before the beginning of the year. Ongoing impediments to Weak budget preparation, cumbersome revision procedures, highly detailed budget budget execution span documentation, and procurement bottlenecks are among the main challenges for timely the periods before, budget execution. In addition the strict annual ("stop and go" or use it or lose it) system during, and at the end of puts pressure on line ministries to spend the entire allocated budget in one year. Despite the fiscal year the above reforms, which have been introduced to speed up budget execution, challenges remain. These include issues from before, during, and at the end of fiscal year: Before the fiscal year, activities may be marked with a bintang (asterix or "star"), to prevent spending on a budget item that has been approved by Parliament. This approach is designed to provide a time extension to the relevant line ministry to complete the required project documentation. However, in practice, it provides incentives for line ministries to submit incomplete projects and gives room for "non-formal negotiation". As a result, a bintang-marked project has to go through a cumbersome approval process and sometimes never gets implemented. The main issues during the fiscal year are complicated budget revision and virement procedures, and detailed budget execution controls. Most issues related to long term challenges also need to be addressed. These include, among others, the shortage of qualified procurement staff; the need to strengthen the capacity of the Satker staff; and the need to improve coordination and communication between the Ministry of Finance and line ministries. The identified issues related to budget execution at the end of fiscal year include: cumbersome and difficult carry-over processes, particularly for multi-year investment projects. These issues need careful consideration, to encourage both flexibility and timely budget absorption. f. Looking forward A number of key policy Reforms in a range of areas could help to improve further the quality of spending, improvements should be particularly in terms of the disbursement profile. These include the following: first, considered to improve simplifying budget revision procedures by increasing flexibility to budget holders in the quality of budget managing their resources; second, simplifying and streamlining budget execution controls; spending third, streamlining the budget preparation process by discontinuing the bintang practice. Continuing the reform agenda to improve public procurement is also important. In particular, this includes moving from the current ad-hoc approach of procurement committees to a sustainable procurement management function, coupled with a national capacity building program. Another priority is to improve the regulatory framework by anchoring it to a comprehensive national public sector procurement law. Reforming civil service Rigidities in civil service rules and current practices also impede the efficient operation of rules and... public institutions and the effective implementation of reform measures Modifications to existing organizational structures are laborious and time consuming, since approval must be sought from the Ministry for State Apparatus. This creates difficulties for managers to select, train, promote and motivate their staff. It also limits the ability of public ministries and agencies to introduce more performance orientated management reforms. ...promoting a medium The Government is also introducing a Medium-Term Expenditure Framework (MTEF) and term focus and program-based budgeting for the 2011 Budget. These are ambitious initiatives that are performance orientation designed to, over time, help promote a greater focus on budget outputs and to gradually are also critical change the nature of expenditure controls, holding policy makers and managers accountable for delivering greater performance improvements and not just complying with financial regulations. THE WORLD BANK | BANK DUNIA December 2010 20 Indonesia Economic Quarterly Maximizing opportunities, managing risks C. INDONESIA 2014 AND BEYOND: A SELECTIVE LOOK Poverty includes both The poverty of a household can be measured in a variety of ways. Income- or income and non-income expenditure-based poverty rates focus on the share of households whose consumption is dimensions below a certain poverty level. However, adequate consumption is just one of a number of different dimensions of human well-being. Others include reduced vulnerability to poverty, education, health and access to basic infrastructure such as water and sanitation, housing 6 and electricity. These multiple aspects of poverty can be reflected in multi-pronged poverty reduction strategies including first making economic growth work for the poor in terms of reducing disparities in incomes across sectors and regions and reducing vulnerability to poverty. Second, ensuring that social services work for the poor, and third that public spending can help to alleviate poverty through expenditures targeted to the poor, for example, on social assistance. Poverty and service Subsequent articles focus on a select sample of topics within these different aspects of delivery is the focus for poverty and service delivery. The first article is related to the issue of vulnerability to this section of the poverty. It examines the effectiveness of the Government of Indonesia's nationwide December IEQ temporary cash transfer program for poor households, Bantuan Langsung Tunai (BLT) which was used in 2005 and 2008 to limit the impact on household welfare of upward adjustments in fuel prices as subsidies were cut. The second article covers both vulnerability and access to health services by analyzing the Jamkesmas health insurance for the poor program. The next two articles, on housing and water and sanitation respectively, cover the challenges on provision of access to these basic infrastructure services. The final article considers how monitoring and evaluation can be used to increase our understanding of the government's ability to deliver goods and access to basic services. To provide context, before these pieces, a brief snapshot of consumption based poverty rates is provided from the 2010 Susenas household survey. Poverty rates have The share of the population below the Figure 19: Aggregate poverty is falling declined since 2006 poverty line has shown a sustained (poverty rate, percent of population) reduction since 2006 falling from 25 25 17.8 percent to 13.3 percent. The number of poor has fallen to 31 million. Rural Sustained growth in aggregate GDP, and 20 20 Urban+Rural consumption, over this period contributed to reductions in both urban and rural 15 15 poverty. The gap between the two poverty rates has remained relatively 10 10 stable with the urban rate just under 7 Urban percentage points lower. Without 5 5 attempting a comprehensive analysis, it is interesting to compare these aggregate trends with the services 0 0 discussed in subsequent articles. For example, urban housing conditions have also been improving, moderately. Similarly, rural and urban access to sanitation services have also been on an Source: Susenas 2010 upward trend but the share of urban population with access to piped water supply has been declining. 6 For detailed analysis of poverty trends in Indonesia, including non-income dimensions of poverty, see the World Bank (2006), Making the New Indonesia Work for the Poor. For an analysis of service delivery see also World Bank (2006), Making Services Work for the Poor. Both reports are available at http://go.worldbank.org/XEIS8O8SE0. THE WORLD BANK | BANK DUNIA December 2010 21 Indonesia Economic Quarterly Maximizing opportunities, managing risks Provincial disparities in Within the headline figures, there continue to be strong provincial variations in poverty poverty rates remain rates. For example, provincial poverty rates vary from 37 percent in Papua to 3.5 percent in DKI Jakarta. Access to basic services also varies strongly with geography. Indeed access to basic services and infrastructure is found to be one of the correlates of household consumption levels, as is education, gender and occupation. For example, the 2010 poverty rates by sector of employment ranged from 19 percent for agriculture to 1.4 percent for industry and 6.2 percent for services. Figure 20: Provincial disparities in poverty remain (poverty rate as percentage of population, by province) Sources: Susenas 2010 THE WORLD BANK | BANK DUNIA December 2010 22 Indonesia Economic Quarterly Maximizing opportunities, managing risks 1. Assessing the performance of an Indonesian unconditional cash transfer: BLT Targeted social Changes to managed price regimes, such as those undertaken repeatedly by the assistance benefits can Government of Indonesia (GoI) during the 2000s, are an important source of risk to the help poor households well-being of poor households. Nonetheless, reductions in subsidies on key consumption manage abrupt changes items such as food, fuel, and power, can free up fiscal space for spending on other areas in macroeconomic conditions... such as health and education. By managing policy changes carefully, governments can achieve such a pro-poor re-allocation of resources while mitigating the losses to income and productivity that poor households will inevitably face. As the Government of Indonesia considers further changes to its own subsidy systems, the following section analyzes the Indonesian experience in delivering social assistance benefits to poor households adversely affected by such shocks. ... and the GoI has solid Previously the GoI used a nationwide temporary cash transfer program for poor experience delivering a households, Bantuan Langsung Tunai (BLT), to cushion the blow from increases in large-scale transfer managed prices and to provide poor households time and budget space to adjust to new program to those affected price regimes. In 2005 subsidy cuts raised household fuel prices by an average of over by reforms ­ Bantuan Langsung Tunai or BLT 125 percent. BLT, a year-long direct cash transfer in four installments, was a GoI initiative designed to mitigate the effects of these increases in fuel prices. Another BLT was delivered in 2008 when another reduction in fuel subsidies coincided with a global food price crisis; later these events were followed by a global economic slowdown precipitated by financial crisis. In both years, funds (for benefits and operations) for BLT were allocated from the implied budgetary savings from the subsidy reductions themselves. The BLT program BLT delivered direct cash assistance to over a third of all households in Indonesia ­ a assisted over a third of remarkable achievement given that it was designed and deployed in less than 5 months. households in Indonesia The post office distributed BLT benefits to 19 million households in every one of Indonesia's provinces in 2005. In 2008, there were fewer beneficiaries but every province continued to be served. Poor households receiving BLT were those benefiting least from the old subsidy regime and were most at risk of consumption reductions caused by price increases and changes in government policy. With cash payments equal to approximately 15 percent of regular household expenditure (IDR 100,000 per month) and a year-long schedule of benefits, these households had budget space and also time to readjust spending patterns to price changes or the global economic crisis. The impacts of BLT BLT's just-in-time cash assistance had positive effects on households and communities at benefits on recipients can benefit levels that did not create incentives for unproductive behavior. This assessment is be gleaned from based on World Bank analysis of a panel of households whose characteristics and household surveys and behaviors were recorded in the Indonesian socioeconomic survey of households qualitative fieldwork (Susenas). This analysis covers the period prior to the BLT's launch dates in 2005 and 2008 and once again after two or possibly three BLT disbursements had already been made. Qualitative surveys in a limited number of areas done by the SMERU research 7 institute were also used to assess the impact of the BLT transfers. BLT benefits were The size of BLT benefits was considered adequate for vulnerable households and cash adequate for basic was delivered at the right time. Beneficiaries indicated that BLT benefits were spent within consumption needs and a week of receipt and used to buy basic necessities (especially rice because it could be benefited both stored) or spent on pressing one-time expenditures like school costs or clothes for the households and wider communities annual Eid ul-Fitr religious holidays. Spending on fuel and transport (which contains a fuel cost component) were also popular uses of BLT funds. The first BLT disbursement in October 2005 corresponded to the greatest one-time nationwide increase in fuel prices 8 and households were able to rely on BLT payments for the next twelve months. In the short run, those households receiving BLT did reduce their fuel consumption even though BLT funds were equal to approximately twice the additional expenditure needed 7 For complete details, see "Social Safety Nets Indonesia: Bantuan Langsung Tunai (BTL), Temporary Unconditional Cash Transfer", World Bank, 2010. 8 In 2008 when prices rose less steeply, BLT delivery was not everywhere simultaneous with price increases but in some areas followed one to two quarters later, and both total amounts and the number of disbursements decreased (from IDR 1.2 million to IDR 900,000 and from 4 to 3 respectively). THE WORLD BANK | BANK DUNIA December 2010 23 Indonesia Economic Quarterly Maximizing opportunities, managing risks for the households to maintain their fuel consumption at the same level as before the subsidy reduction. In the long run, and prior to the subsidy reductions (in 2005 and 2008), fuel as a share of total expenditure for target households was just under nine percent, so BLT did not significantly distort household fuel consumption decisions. Where district macroeconomic environments were weakest ­ as defined by average household expenditure performance ­ BLT recipient households were able to increase their expenditures at significantly higher rates than all other non-BLT households.9 In addition, by increasing consumption opportunities for poorer households, BLT had positive multiplier effects on expenditures throughout the wider community as well. BLT households more Those households receiving BLT also found new jobs at increased rates (Table 8). often found jobs... Between 2005 (pre-BLT) and 2007, the slight long-term reduction in hours worked was broadly the same across both BLT recipients and households not receiving BLT. However, in 2008, BLT household heads who previously were not working and without a job or business were more likely (by 10 percentage points) to report that they had become employed. In addition, across nearly all sectors, heads of households receiving BLT were not more likely to leave work if they had a job. This was reflected in statements made by 2005 BLT recipients and other community members who said that "the value of BLT was not enough to fulfill all living needs" and therefore was not sufficient to create work apathy. ...more often consumed Impacts were also seen in terms of usage of health services. Households receiving BLT health services... avoided reductions in health expenditure that can have lasting negative effects. Indeed, in areas most heavily affected by epidemics poor BLT households more often sought health services than households without BLT. There was variation in this positive effect of BLT on health care usage; for example, utilization was greater for inpatient than outpatient care, and larger also for insured households. ...more often kept their In addition, BLT households avoided increases in child labor and reductions in education children in school and (Table 9) which also feed through into adverse longer-term effects for well-being and the out of labor markets... opportunities of children and the next generation of households. From higher initial levels, the rate by which child labor fell from 2008 to 2009 is slightly higher among BLT households. While average national gross enrollment rates were about constant between 2008 and 2009, the effect of BLT on school participation rates for 6 to 18 year olds was positive. This positive impact was more pronounced for secondary school age children, aged 12 to 18 years old, almost double the effect seen for children aged 6 to 12 year olds. ...and maintained regular BLT households were able to make regular or "average" consumption choices. When food consumption choices prices rose steeply during 2008, all Indonesian households cut back on meat and instead consumed more fish, vegetables, rice, and dairy; BLT households switched into these goods at the same rates as non-BLT households. BLT households actually had slightly smaller rates of increase in tobacco expenditure relative to the rest of the poor population while rates of increase in alcohol consumption were approximately equal. Retiring or taking on new debt was a popular use for BLT according to beneficiaries; such financial management is a common mitigation and prevention behavior in Indonesia. During the 2008 BLT, funds were more often spent on education, likely because major urban centers received the first transfer at the end of May, or at least a month before upcoming-year school fees and other non-fee school charges would have been assessed. Household experience In summary, it is clear that the pessimistic forecasts regarding BLT ­ that said it could shows that initial encourage dependency, reduced labor hours, or bad consumption choices ­ were pessimism concerning unwarranted. Households benefited from a year-long cushion during which they could re- the behavioral effects of adjust behaviors and they did so without exiting the labor market or choosing to work BLT in Indonesia was unwarranted... fewer hours. They also did not substitute the labor of school-age children for the labor of older household members and in fact enjoyed increased use of education and health services. Regarding consumption of food and tobacco, BLT households continued to spend much like other poor and non-poor Indonesian households 9 Weak (strong) districts are defined as those with average per-capita expenditure growth equal to the th th 25 percentile or below (75 percentile or above) of the nationwide distribution of district average per- capita expenditure growth. Beginning in 2004, growth in Indonesian real GDP has been averaging approximately five and a half percent per year and nationally, poorer households gained relatively more in expenditure terms than did richer households during both the 2005 and 2008 BLT periods. THE WORLD BANK | BANK DUNIA December 2010 24 Indonesia Economic Quarterly Maximizing opportunities, managing risks Table 8: BLT recipients found jobs at a greater rate Table 9: BLT households also avoided reductions in school participation and increases in child labor BLT impact: percentage BLT Impacts, 2008-2009: Percentage points increase in likelihood of 32** finding jobs, 2008-09 School participation BLT non-BLT Percentage finding jobs, All 6-18 yr olds +1.2 36 30 2008-09 Working Hours 12-18 yr olds +2.6* 2005 39.2 41.0 Labor participation 2007 37.7 39.8 All 6-18 yr olds -2.3*** Change -1.5 -1.2 All 2008 household averages Poor All non- 2009 BLT working sector: (percent) BLT BLT BLT st 1 most common Agriculture Gross Enrolment rate 72 76 84 nd 2 most common Service rd Labor Participation rate 13 13 9 3 most common Construction, Retail Note: *Significant at the 5 percent level. Impacts are Note: *Significant at the 10 percent level. *** Significant at measured as increases over matched poor and non-BLT the 1 percent level. Impacts measured as increases over households (for previously unemployed heads of rates in matched poor non-BLT households. household only). The 2008/2009 Susenas do not allow Source: Susenas and World Bank staff calculations calculation of hours worked. Working sector choices for BLT household heads are ranked the same regardless of employment status in 2008 Source: Susenas and World Bank staff calculations ...however, there were BLT implementation and operations ­ from targeting through to complaint resolution ­ serious weakness in BLT were weak and are in need of improvement. Compressed delivery schedules, insufficient operations and guidelines and incentives, a lack of clear accountability between BLT agencies and implementation across operational bodies, poor technology, and a difficult and varied poverty environment most agencies combined to make all non-delivery operations problematic. Underestimates of necessary administrative resources may also have contributed to operational shortcomings. Targeting of BLT to poor households was moderately successful (Figure 21 shows BLT coverage relative to other GoI social assistance programs), but a significant proportion of benefits ended up with non-poor households. Mostly-failed socialization, including of targeting procedures, led to protest activity and delivery disruption as well as worse targeting outcomes. Finally, the lack of complaint monitoring, information management, or audit systems prevented any improvements to implementation either in real time or in the non-BLT years between 2006 and 2008 (Figure 22 shows roughly constant targeting performance in 2005 and 2008). A lack of oversight Too little detail in implementation arrangements and weak chains of authority and control contributed to a rise in contributed to a lack of oversight; as a result of which deductions of BLT benefits were on deductions of benefits at the rise between 2005 and 2008 (Table 10). It is unknown in most cases whether these administrative levels deductions are petty corruption or whether they produce community-desired outcomes. Regardless, they are not recorded, monitored, or evaluated. Neither BLT guidelines nor program officials are equipped to manage or stop such re-distribution, and a lack of socialization kept beneficiary households from interrupting, reporting, or acting on these modifications to the program. THE WORLD BANK | BANK DUNIA December 2010 25 Indonesia Economic Quarterly Maximizing opportunities, managing risks Figure 21: GoI social assistance program coverage, 2008 Figure 22: BLT incidence and coverage, 2005 and 2008 and 2009 (percentage of decile receiving/using program) (percent of households) 100 100 60 60 Poor Non-poor Incidence 2005 Incidence 2008 households households 80 80 Coverage 2005 Coverage 2008 45 Raskin 2009 40 60 60 BLT 2008 30 Jamkesmas 40 40 2009 coverage 20 15 20 20 Jamkesmas 2009 usage 0 0 0 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 Expenditure decile Expenditure quintile Source: Susenas and World Bank staff calculations Note: Incidence is share of total BLT benefits going to the quintile while coverage is the percentage of the quintile which receive BLT benefits Source: Susenas and World Bank staff calculations Table 10: BLT deduction frequencies, amounts, actors, and uses 2005 - 2006 2008 - 2009 Frequency (%) 10 46 - 54 st nd Amount (IDR `000) 1 tranche 2 tranche Mean 53 72 67 Median 20 60 50 Mode 10 100 100 Deducted by: st 1 most common Sub-village Admin. (51%) N/A nd 2 most common Village Admin. (25%) N/A Deducted for: st 1 most common Redistribute Equally (63%) Redistribute Equally (42%) nd 2 most common Collective Transport (26%) New Identity Card (29%) Note: Mode is the amount most frequently deducted. Deduction frequency as derived in 2005 cannot be calculated in 2008. In 2008, deduction frequency is calculated 1) as the proportion of beneficiaries receiving less than the stipulated benefit amount (46 percent) and 2) as one minus the proportion of beneficiaries who answer "No" to all questions asking about deductions made by different actors, including a catch-all "other" category (54 percent). Source: Susenas 2005, 2009 and World Bank staff calculations Overall BLT was a net Data from direct BLT beneficiaries shows that BLT was successful in cushioning the blow positive for households, from increased fuel, transport, and food prices, or externally produced macroeconomic but a temporary and and financial shocks, but BLT was not designed to be a poverty reduction system. BLT unconditional cash provided protection to poor households in a manner that was more progressive than the transfer should be supplemented by subsidies it was replacing. Moderately-sized benefits were delivered at the right time, for additional safety net the right duration, and with a very lean administrative apparatus. However, for long-term initiatives directed at poverty reduction goals, BLT is not appropriate. Continuing investments in health, longer-term determinants education, and business, which can help disrupt the intergenerational transmission of of poverty poverty, are better served by programs like conditional cash transfers, free health insurance, secondary and university scholarships, and micro loans for entrepreneurs (see "Indonesia Social Assistance Public Expenditure Review", World Bank forthcoming). THE WORLD BANK | BANK DUNIA December 2010 26 Indonesia Economic Quarterly Maximizing opportunities, managing risks 2. Does JAMKESMAS protect the population from health expenditure shocks? The Government is facing Providing financial protection from shocks to consumption due to health expenditures is an enormous challenge in one of the health development goals in Indonesia as stated in the National Strategic Plan expanding health for Health. The Government made a commitment in 2004 to achieve Universal Coverage insurance coverage to of health insurance, with the passage of the National Social Security System Act. half of its population However, to achieve this, the Government is facing an enormous challenge as currently more than half the population has no form of health insurance. The Askeskin program (now known as Jamkesmas), a tax-financed program to provide health insurance to the poor, was introduced as one of the social assistance programs to mitigate the consequences of the reduction in fuel subsidies announced on the 1st of March, 2005 (see Box 4 for details). According to 2009 Ministry of Health data, the program covers 76.4 million people including the near poor population. Of those with formal health insurance coverage in Indonesia, Jamkesmas accounts for two-thirds. Jamkesmas has Despite evidence of some mis-targeting and program leakage, the Jamkesmas program improved poor appears to have helped to equalize the overall distribution of access to health insurance population's access to across the population. Before the Jamkesmas program started in 2005, health insurance health insurance... coverage among the poor was 16.5 percent in 2004, based on coverage from previous health insurance for the poor. Since then coverage among the poor has almost tripled to more than 43 percent in 2009. Considering that the coverage of other health insurance schemes is relatively stable, Jamkesmas is the main driver behind the rise in health insurance coverage to almost half of the population. Figure 23 highlights how inequitable the distribution of other types of insurance is. Coverage by other10 types of insurance (including Askes, Jamsostek and the smaller programs) is concentrated in the top three deciles, with 33 percent of individuals living in households that hold other forms of insurance, compared to only 4.4 percent of households in the bottom three deciles. Including the Jamkesmas program, total insurance coverage in the poorest three deciles rises to 48 percent, higher than coverage for both the richest three deciles (45 percent) and the middle four deciles (40 percent). Figure 23: Jamkesmas health insurance covers almost half the poor population (percentage of individuals living in households with access to health insurance, by expenditure decile, 2009) No Insurance Jamkesmas/Askeskin All other insurance 100 4.4 12.0 80 33.0 43.3 28.0 60 11.8 40 60.1 55.3 52.3 20 0 Bottom 3 deciles Middle 4 deciles Top 3 deciles Source: Susenas 2009 ...which led to improved Individuals who have access to Jamkesmas are more likely to access health care. Based poor population's access on the Susenas 2009 household survey data, individuals with Jamkesmas membership to health services, mostly are more likely to use outpatient services than those without any health insurance, at public facilities especially in the lowest three deciles (Figure 24). Access to Jamkesmas is also correlated 10 Other schemes together account for coverage of less than 10 percent of the population. They include all the categories of health security/insurance mentioned in the SUSENAS survey other than Jamkesmas, i.e. (i) JPK (Health Insurance) for civil servants/veterans/pensioners, (ii) allowance/reimbursement from company or Self Insured, (iii) JPK Jamsostek for formal employees, (iv) private health insurance, (v) community-based health funds and (vi) JPKM (health maintenance organization, HMO-like health insurance). THE WORLD BANK | BANK DUNIA December 2010 27 Indonesia Economic Quarterly Maximizing opportunities, managing risks with an increase in the likelihood of inpatient service utilization, as well as with a slightly longer length of stay. Jamkesmas members overwhelmingly choose to use public rather than private facilities, most likely reflecting the benefit structure of the program in which its benefit package offers limited availability of private providers in its provider network. Box 4: A brief introduction to the Jamkesmas program The Jamkesmas program provides health insurance for the poor and the near-poor (equivalent to approximately the lowest three expenditure deciles of the population) who are targeted through the application of a means test, with a comprehensive package of health benefits. The program is tax- financed by the central government and does not require any insurance contributions or cost- sharing on the part of beneficiaries or local governments. The budget cost per individual covered was initially IDR 5,000 per month, and now increased to IDR 6,500 giving a total budget for the current Jamkesmas program roughly equivalent to 20 percent of the central government health budget. The program is similar in spirit to several other initiatives that have recently been introduced by countries in the region such as in India (the Rashtriya Swastha Bima Yojna), Thailand Universal Coverage scheme and the health insurance program for the poor in Vietnam. The benefit package is quite generous and requires no copayments (although this does not imply that out-of-pocket spending is zero), but the provider network is mostly limited to public facilities. In fact, Jamkesmas' benefit package is more generous than that of the other social insurance schemes, including the contributory civil servants health insurance program, Askes, and the program for formal sector employees, Jamsostek. For example, Askes beneficiaries often face high copayments (especially for inpatient care), have very limited access to private providers, and benefits are limited to the member, the spouse and up to two non-working, non-married children. The providers included in the Jamkesmas program network are mainly government-owned facilities and are paid using a combination of capitation, fee-for-service, or Diagnostic Related Groups (DRGs), depending on the type of provider. The program pays for primary care services by capitation, reimburses inpatient services at primary health care facilities on a fee-for-service basis and has just recently started to use a DRG type provider payment mechanism for hospital inpatient care. The DRG was piloted in 15 vertical hospitals in 2008 and expanded to all hospitals in the network in 2009. In addition to the DRG payment, public providers receive subsidies in the form of the salaries of workers and some capital costs. Only a limited number and type of private providers are contracted, and mostly in the urban areas of Java (in 2009, private hospital accounted for more than 30 % of total hospitals in the network, but a far smaller share of the total number of beds). Source: World Bank staff Figure 24: Individuals with Jamkesmas coverage are more likely to use inpatient services a) All respondents b) Bottom three expenditure deciles (percentage of individuals using public and private facilities for inpatient care, among those who used inpatient services, by insurance type, 2009) 100 100 100 100 Public Facility Private Facility Public Facility Private Facility 80 80 80 80 60 60 60 60 40 40 40 40 20 20 20 20 0 0 0 0 No Insurance Jamkesmas All other No Insurance Jamkesmas All other insurance insurance Source: Susenas 2009 THE WORLD BANK | BANK DUNIA December 2010 28 Indonesia Economic Quarterly Maximizing opportunities, managing risks Jamkesmas beneficiaries Susenas 2009 data also suggest that Jamkesmas beneficiaries are, on average, better are better protected from protected from the adverse financial effects of health shocks. Compared to households shocks due to health without insurance, and also compared to households with other types of insurance, payment Jamkesmas households have systematically lower Out of Pocket (OOP) spending, conditional on utilization. This is probably because the Jamkesmas benefit package is more generous than many other types of insurance, covering almost all types of care with no copayments and few service limitations. Importantly, this protective effect was more pronounced among households of lower economic status. Jamkesmas beneficiaries also have a lower incidence of catastrophic expenditure than those with no insurance and even those with other types of insurance. Moreover, the impoverishing effect of uninsured health expenditures, whether measured in terms of the increase in the incidence of poverty or the increase in the poverty gap, is smaller. However, lower utilization Nevertheless, it is important to note health service utilization among Jamkesmas compare to other health beneficiaries remains low compared to those covered by other types of insurance despite insurance beneficiaries a relatively generous benefit package. This indicates that other barriers for the poor to indicates other barriers access health services persist. These barriers may include other out-of-pocket expenses, for the poor to access service persist opportunity costs, distance to facilities, perceived low quality of care of the network providers, and availability of services. Also, OOP health Also, it is important to note that OOP health expenditures ­ although lower than among expenditures remain those without coverage -- remain relatively significant among Jamkesmas beneficiaries. significant among This may suggest that those with no health insurance coverage use less health services Jamkesmas beneficiaries thus have lower out of pocket spending. This finding suggests that although Jamkesmas has shown protective effect as mentioned above, it indicates that the program has not yet provided adequate protection to health shocks. This will require further investigation, e.g., via the use of focus group discussions among beneficiaries: Are transportation costs a factor? Do users face informal or other "hidden" payments? Leakage in targeting is a The program performs relatively well in terms of increasing utilization and enhancing serious program financial protection, but as mentioned above this remains inadequate. One of the issues is weakness that needs to that a large share of the population which, according to their socioeconomic status, should be addressed be eligible for participation in Jamkesmas, but does not currently participate in the program. Not all of the poor are reached by the program, and there is considerable leakage to the non-poor. Part of this may be weaknesses in the program's targeting mechanism, but part of this might be the design and the implementation of the membership management of the Jamkesmas program itself. This is serious program weakness that needs to be addressed. Nevertheless, Jamkesmas participants are, on average, of poorer socioeconomic status than those who are not covered by Jamkesmas, confirming that the program is indeed pro-poor. Options on the role of In relation to the Government's intention to achieve Universal Coverage (UC), the Jamkesmas in achieving question is the role that the Jamkesmas program, which currently accounts for two-thirds universal health of the currently insured, will play. There are several options, including expanding the insurance coverage program's coverage to all uninsured, or to vulnerable population groups only, such as women and children. Each option has its own challenges for implementation and also each has significant fiscal implications. An expansion to For the option of expanding the program to the currently uninsured, the cost for a UC additional population program, scaled up to full UC by 2020, is projected to be between 1.04 percent of GDP sub-groups financed by (low cost scenario) and 1.46 percent of GDP (high cost scenario; both scenarios include general revenues will only health insurance costs but exclude all other public spending on health) 11. To put this have substantial fiscal implications in context, in 2008 total health spending is 2.2 percent of GDP (WHO 2010) which is 11 Yves Guerard, "Actuarial Costing of UC Coverage Options: Model and Summary Results", Consultant Report, World Bank Indonesia, Jakarta 2010. The basis for the Government to set the premium of the Jamkesmas program, IDR 5,000 or now IDR 6,500, per member per month (PMPM) is not based on an actuarial calculation. The World Bank conducted an actuarial study as a part of the Health Sector Review activities. The actuarial study uses data from the civil servants social health insurance (ASKES) program and once adjusted to the whole population the study calculated that the baseline cost per member per month in 2010 ranges from IDR 18,704 (low baseline) to IDR 25,662 (high baseline). THE WORLD BANK | BANK DUNIA December 2010 29 Indonesia Economic Quarterly Maximizing opportunities, managing risks almost equally divided between public and private. Although the total cost projection includes general subsidies to public personnel salary and public health facilities, the magnitude of these figures still raises concerns about the option's long-term sustainability. Moreover, 1.46 percent does not include substantial spending needs for public health and primary and preventive care, which now make up an estimated 1 percent of GDP. In order to remain To remain affordable any program expansion will need to be accompanied by efficiency affordable, any program improvements. The introduction of Diagnostic Related Groups (DRGs)12 in hospitals as a expansion will need to be cost containment effort has been a good start. However, the implementation of DRGs accompanied by needs to be improved, and so do other cost containment measures including utilization efficiency improvements review, provider profiling, other provider payment methods, and the gatekeeper function of primary level providers as a key part of referral system needs to be strengthened. Important decisions need Based on existing health financing programs, the Government of Indonesia still has to to be made in expanding decide on the approach to achieving universal health insurance as the end goal. These existing health financing approaches include the National Health System (NHS)-like program or Social Health programs to achieve UC Insurance (SHI), or variant or combination of both. The Social Security Law mandated the SHI model using contributions from its beneficiaries. Regardless of the option chosen important decisions on the basic benefit package, provider payment mechanism and contracting arrangements and strategies to respond to supply-side constraints need to be made. The short-term challenge More immediately, while the debate on future program expansion continues, there is the of improving the targeting short-term challenge of improving the targeting and the management of the existing and the management of Jamkesmas program. Efforts to improve targeting are ongoing, including efforts to the existing Jamkesmas establish a unified database for potential beneficiaries, but over and above those efforts, program there are additional specific problems related to the targeting of the Jamkesmas program. These include discrepancies between data at the central and sub-national levels and also the use of different targeting criteria in different districts. Improving the program management is very important to enhance Jamkesmas' performance. The absence of a reliable information system, for instance, prevents the Government, as well as other stakeholders, from evaluating the effectiveness of the program in achieving its objectives. Records on utilization of both inpatient and outpatient of primary level of care, referral services, and drugs, and hospital claims, can be a start for a data warehouse that provides basic information to monitor and evaluate which can be used to further develop Jamkesmas program, especially if it is considered as the stepping stone to achieve Universal Coverage. 12 Diagnostic Related Groups (DRGs) is a provider payment mechanism based on defined groups of diagnoses that are both cohesive and similar in the intensity of resources THE WORLD BANK | BANK DUNIA December 2010 30 Indonesia Economic Quarterly Maximizing opportunities, managing risks 3. Housing and services for low-income households in Indonesia Indonesia is facing Indonesia is facing increasing pressure on its cities as they expand. As countries housing problems as its urbanize, government attention on urban housing becomes increasingly important cities expand because coordination is needed to ensure provision of infrastructure, support property rights, enforce appropriate regulation, and mitigate negative externalities such as congestion and pollution. Without attention to these issues, the urban living environment can quickly deteriorate, leading to health and social problems, and reducing the benefits of urban agglomeration. Low-income groups are Greater attention to the housing conditions and access to infrastructure of low-income particularly affected, and groups is also needed, because they are disproportionately affected by housing problems this can have negative and this can have negative impacts on society as a whole. For example, limited access to impacts on the society as services can lead to the disposal of waste in rivers, lakes and other public open spaces, whole contaminating the ground water for all. Not only do poor housing conditions negatively impact the urban environment, they also reduce the country's overall development potential. Housing of a decent quality is important as a space to live, and good quality housing, especially access to basic infrastructure, can bring health benefits and social stability for families and children. The quality of housing The quality of housing and services in Indonesia lags behind that of comparable countries, and services in Indonesia and there seems to be a growing supply shortage. Moreover, low-income households lags behind that of bear a greater incidence of low-quality housing without services, even though they spend comparable countries a greater share of income on housing. Compared to other countries in South East Asia, especially in access to water and sanitation even those with lower per capita incomes, Indonesia lags behind in the provision of water facilities and sanitation for urban households. The low access to sanitation facilities especially stands out. For example, the share of Indonesia's urban population with access to improved sanitation is of just under 70 percent is as low as that of Cambodia, which has about a third of the US dollar per capita income. Housing conditions in Housing conditions in Indonesia have Figure 25: Changes in housing conditions in Indonesia have been been improving, but not to a large urban areas, 1988 - 2007 improving but not to a degree. Figure 25 shows the share of (percent of urban households) large degree urban households with access to 100 100 infrastructure services, such as piped water, improved sewage facilities and 1988 2007 electricity, the share of households 80 80 that are built of permanent materials (e.g. concrete), and the share of 60 60 households with an official title to their property from the National Land Agency (BPN). The biggest 40 40 improvement in housing conditions has been in terms of construction 20 20 materials; the share of houses built with permanent materials increased 0 0 from 60 to 85 percent from 1988 to 2007. Improvements in access to Access to Permanent Offical land services and land titling were much services materials title lower, growing by 6 and 7 percent Source: Struyk et al., 1990; Biro Pusat Statistik, respectively. Yet, the incidence of 2007 quality housing is very unevenly Note: # Official land title indicates title from the distributed. National Land Agency (BPN) THE WORLD BANK | BANK DUNIA December 2010 31 Indonesia Economic Quarterly Maximizing opportunities, managing risks Low-income households Low-income households have much lower rates of access to water and sanitation, worse get less housing and housing conditions, and less secure property rights than higher income households do. basic services... Figure 26 shows the share of households that have access to basic infrastructure like water, sewage and electricity; housing built of permanent materials and with non-dirt floors, and housing with access to official land title, for households in different expenditure deciles. The difference in the quality of housing and the security of property rights for poorer households is clear. For example, less than half of the households in the lowest expenditure decile have access to infrastructure while almost 90 percent do so amongst the top decile. Figure 26: Housing materials, infrastructure and land title by Figure 27: Rent-to-income and-expenditure ratios expenditure deciles, 2007 (rent as a share of expenditure; percentage increase in rent as (share of households, percent) share of expenditure) 100 100 35 35 Permanent Materials Percentage increase in rent to 30 expenditure (2001-2007) 30 80 80 25 25 Rent to expenditure, 2007 60 60 20 20 Access to Infrastructure 40 40 15 15 BPN Title Rent to income, 2001 10 10 20 20 5 5 0 0 0 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Household Expenditure Decile Household Expenditure Decile Source: Biro Pusat Statistik, 2007 Source: Biro Pusat Statistik, 2001, 2002, 2007 ...but pay more for it Although low-income households experience much worse housing conditions, the poorest relative to their total households spend a greater share of their income on housing than high-income expenditures households do. Figure 27 shows the rent-to-income ratio for households, again grouped by expenditures as a proxy for incomes. In 2001 poorer households dedicated more than 20 percent of incomes to housing on average, while high-income households only about 17 percent. The difference for rent-to-expenditure, from 2007, is less marked, although the poorest decile still spent proportionately more on housing than the richest. There is an increase in The more dramatic trend is the increase in the share of household expenditures dedicated the share of household to housing, which is much greater among the poor. Housing expenditures have increased expenditures dedicated to faster (about 1.4 times faster) than expenditures for all income groups since the recovery housing, particularly from late 1990s financial crisis. This increase does not necessarily represent a problem, among low-income groups however, as to some extent it stems from an increase in incomes and a positive income elasticity of demand for higher quality and more expensive housing. The extent to which the increase stems from demand for quality also depends on the housing market in question ­ some cities have seen housing prices increase as demand for land grows while in other cities housing prices have increased due to growing incomes. Indonesia faces a Indonesia also faces a problem of housing supply. Indeed, the government frequently problem of housing cites an estimated backlog of 800,000 housing units. Analysis of household formation supply... rates confirms that the country faces a housing shortage, and by some measures the backlog could even be twice as large as estimated by the government. These measures are extremely sensitive to assumptions, and it is thus preferable to report the facts of household formation, rather than the estimate of the supply shortage. In a housing system with adequate supply, people who wish to form a new household by moving into an independent dwelling unit should be able to do so. Examining household size and the number of adults who live in their parents' home, who can be thought of as potential new households, can be used to measure the sufficiency of housing supply. THE WORLD BANK | BANK DUNIA December 2010 32 Indonesia Economic Quarterly Maximizing opportunities, managing risks ... as shown by the In a country that is urbanizing and growing like Indonesia, it is expected that household decrease in household size decreases and that middle-aged people form new households at an increasing rate. formation rates... In fact, both of these trends followed these expectations during the latter quarter of the 20th century. However, these trends reversed course beginning in 2001. The share of 30 to 40 year olds classified as children, i.e. living with parents, increased from 8.7 to 12.8 percent between 2001 and 2007, and the share of people in this age range classified as children-in-law almost doubled from 2.2 to 3.9 percent. This means that more married couples are living with parents, probably since they are not able to find suitable housing. ... particularly affecting Not surprisingly, this change has a greater effect on low-income households, who already low-income households had a lower household formation rate. This is especially true for the young, as young adults without sufficient means must live with family even after forming their own family. For example, in large cities in Indonesia, the share of people that have formed a household at the age of 18 to 30 in the lowest income quintile was 24 percent and for those in the upper-income quintile was 39 percent. Access to land might be Although the exact cause of the reduction in household formation is not yet clear, strong an important aspect of correlations between housing affordability and household formation across cities implies housing supply limitation that housing supply plays a major role. Given the importance of self-build housing, it is likely that access to land is playing an important role in limiting new housing supply. But, more research is needed to identify the factors leading to a constraint in housing supply. A final, but important A final, but important dimension of an evaluation of the housing sector is the connection to dimension of an urban efficiency and the urban environment. The location of housing within cities relative evaluation of the housing to employment, for example, impacts the efficiency in terms of congestion and travel time sector is the connection to work. As upper-income households move to the periphery, but continue to work in the to urban efficiency and the urban environment central city, they must drive longer distances to work, leading to wasted time and congestion. In addition, the organization of housing lots within neighborhoods can have important impacts on transportation and thus congestion. Superblocks with few entrances, for example, can lead to localized bottlenecks. Housing of poor quality, Additionally, housing of poor quality, especially in terms of sewage and waste disposal can have significant systems, can have significant negative environmental impacts in cities. Far too many negative impacts on households in Indonesian cities discard waste into rivers or other open areas, while the environmental quality in use of septic tanks of low quality at urban densities can contaminate ground water. Just cities. as there are strong arguments for economies of scale and efficiency in networked infrastructure, such as sewage and water systems, there are major negative externalities associated with not having these systems in urban areas. In spite of the limited evidence that is available, the urban efficiency implications of the location and neighborhood organization of housing in Indonesia, and the environmental impacts of limited sewage and waste disposal systems surely merit policy, as well as research attention. THE WORLD BANK | BANK DUNIA December 2010 33 Indonesia Economic Quarterly Maximizing opportunities, managing risks 4. Incentivizing local governments to take responsibility for water and sanitation services Public investment in Investments in water and sanitation are investments in development and recognized as water and sanitation are important in achieving the other Millennium Development Goals (MDGs) targets such as projected to rise eradicating poverty and hunger, achieving gender equality and reducing child mortality. significantly in the next The Government's RPJMN (2010-2014) sets out an ambitious agenda for water and five years sanitation over the next 5 years. National government budgets for the sector, largely through the Ministry of Public Works, are expected to double for water supply and increase four-fold for environmental sanitation compared to the previous planning period. Annual special allocation grants (DAK) have also more than doubled since 2005 and will become available to support local government investments in community-based water and sanitation systems. These are signs that positive steps are being taken to curb the downward trend of water and sanitation service levels experienced in the last decade. This section reviews these trends and then focuses in on the incentives of sub-national government to provide water and sanitation services and the related policy reforms aimed at improving service provision at the local level. Figure 28: Declining total access to improved water supply Figure 29: Urban usage of unimproved water supply has (percent of population with improved water supply) risen (type of water supply, percent of urban population) 90 90 Unimproved Other improved Piped 100 100 Urban 80 80 80 80 Total 60 60 70 70 40 40 20 20 Rural 60 60 0 0 2006 2007 2008 2009 2006 2007 2008 2009 Source: Susenas (various years) Source: Susenas (various years) Note: Improved water supply is piped water plus protected Note: Other improved water supply is protected well, spring well, spring and pump and pump. Unimproved is population minus piped and other improved supply Access levels to piped The rate of urban access to piped water supply has been declining (Figure 28). This trend water are low following started at the turn of the century with recent evidence indicating that the trend continues. years of poor cost- Currently only 15 percent of the population ­ 25 percent in urban areas (Figure 29) ­ or recovery... about 27 million people - have access to piped water ­ an extremely low level of coverage compared to countries at similar levels of income as Indonesia. In low coverage areas, the poor are inevitably worse off ­ for example, about half of the poorest 10 percent relies on unsafe sources of drinking water compared to 90 percent coverage in the richest 10 percent. Current coverage levels fall far short of the Government's targets of 32 percent of people connected to safe water sources through piped connections and a total of 70 percent with access to safe water. ...with a declining capital The state of the sector reflects rapidly declining equity in urban water utilities (PDAMs) as stock of urban water a result of years of poor financial viability and low levels of investments. An examination of infrastructure 42 audit reports published in 2009 shows that most PDAMs' levels of capital investments fall below the rates of asset depreciation, meaning that the capital stock is declining (Figure 31). THE WORLD BANK | BANK DUNIA December 2010 34 Indonesia Economic Quarterly Maximizing opportunities, managing risks Figure 30: Quality of access to water supply and household Figure 31: Depreciation in urban water utilities (PDAMs) can income are highly correlated exceed new investment (percent of decile, 2007) (depreciation, IDR billion in 2006, log scale) Unimproved Sources Other improved sources 100000.0 Bottled Water Piped Water 10000.0 100% 100% 1000.0 80% 80% 100.0 60% 60% 10.0 40% 40% 1.0 20% 20% 0.1 0% 0% 0.0 1 2 3 4 5 6 7 8 9 10 0.0 1.0 100.0 10000.0 Income decile Investment (IDR billion in 2007), log scale Source: Susenas 2007 Source: BPKP PDAM Audited Reports Note: Sample of 42 PDAMs Urban sanitation services In contrast to the picture on water supply, urban access to sanitation services has slowly, are gaining ground but steadily increased (Figure 32). Of note, however, is that urban sanitation service primarily means toilets flushing into a septic tank (about 70 percent) or a pit (about 20 percent) as a final point of disposal. The majority of the sanitation infrastructure that exists is due to investments by households themselves who focus on in-house and on-site facilities and not on treatment and disposal. It is not clear what portion of domestic sewage is disposed of untreated into water courses and lands, but a conservative estimate would be that at least half of it finds its way into the environment. According to a 2008 report by the World Bank's Water and Sanitation Program, East Asia and Pacific, Indonesia is estimated to have lost an equivalent of 2.3 percent of its GDP in 2006 due to 13 poor sanitation. Of the impacts evaluated, effects on health and water resources contribute the most to estimated overall economic losses, which also includes losses to tourism receipts and the environment. Figure 32: Access to improved sanitation (percent of population) 100 100 Target MDG 80 80 76.8 Urban 60 62.4 60 55.6 40 40 Total 20 20 Rural 0 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Adapted from Bappenas (2010), "Report on the Achievement of the Millennium Development Goals 2010" Note: MDG is Millennium Development Goals 13 World Bank (2008), Economic Impacts of Sanitation in Indonesia: A five-country study conducted in Cambodia, Indonesia, Lao PDR, the Philippines, and Vietnam, under the Economics of Sanitation Initiative (ESI). THE WORLD BANK | BANK DUNIA December 2010 35 Indonesia Economic Quarterly Maximizing opportunities, managing risks Sub-national Although the urgent need for capital maintenance, renewal and investment is well governments have an recognized, the sector faces a huge agenda in enhancing investment levels. A key player important role to play in in this effort will be sub-national governments to whom responsibility for water and financing the sector sanitation services has been decentralized. Good local governance is A detailed analysis of six towns and cities points to good local governance as a key factor associated with for improved service. Good governance means a situation in which sub-national improvements in water governments respond to their citizens demand for water and sanitation services by and sanitation services making policy choices (usually an investment in the utility and supporting appropriate levels of tariffs) as well as by making utilities accountable for their performance. Towns with good governance have seen improved services, while demand for better services goes unanswered in towns with poor governance. In Ciamis, Malang and Palembang, services and investment have improved markedly over the last five or so years. In these cases, the improvements started when a new mayor was elected and made water sector improvements a priority. In Palembang, the mayor appointed a new Director of the urban water utility (PDAM). The mayor and PDAM Director agreed on a business plan to rapidly improve services. The local government supported the PDAM financially, and the PDAM in turn delivered the agreed improvements. In Palembang, the average annual increase in new connections has been 2.5 times higher since governance improved (Figure 33). In Palembang and Malang, the mayors were duly reelected, in part on their record of improving water services. Figure 33: Good Governance in Kota Palembang Leads to Better Services (number of house connections) Source: Water and Sanitation Program, unpublished work The national Government The success of governance in improving quality of service at the sub-national level raises has initiated a number of the question of does the way in which national program are implemented reinforce good new reform programs to governance? In line with the RPJMN ambitions, the national government has embarked assist sub-national on a number of reform programs that are taking new approaches to assisting sub-national governments in fulfilling their water and sanitation governments in fulfilling their roles and making them better accountable. For example, the service roles and Accelerated Sanitation Development for Human Settlements ("PPSP") program is a increasing their substantial program dedicated to building capacity at the local level to pave the way for accountability sanitation service delivery. The program will support over 300 Indonesian cities/districts develop sanitation strategies on the basis of which investment support from the central government will be provided for sanitation infrastructure. The Ministry of Public Works also continues to work with revitalizing the `health' of PDAMs, ensuring first of all that a supportive policy environment is facilitated between them and sub-national governments. In relation to the debt restructuring program of PDAMs, the Ministry of Finance has put in place sanctions to PDAM owners, such as the ability to intercept fiscal transfers, in the event that arrears recur. This and other new initiatives signal a search to find new strategies that fit the new realities. THE WORLD BANK | BANK DUNIA December 2010 36 Indonesia Economic Quarterly Maximizing opportunities, managing risks But, sub-national Technical support for planning and unblocking the financing bottleneck linked to PDAM government continue to debt are definitely important steps to creating increased capacity for accountable service face poor incentives to delivery by sub-nationals. However, the capacities developed can quickly be overwhelmed operate and maintain if other perverse incentives remain unaddressed. One such potentially critical issue is the water and sanitation infrastructure lack of incentives for sub-national governments to operate and maintain investments given the way national government funds infrastructure development. This is still largely done through handing over of assets built by central agencies through deconcentration funds (dana dekonsentrasi). Aside from the pitfalls of ill suited design and rent-seeking, the off- budget approach to investment funding delinks capital development with recurrent cost provisioning in the planning and budgeting system. In water supply, local In the water supply sector, there is a need to reverse the trend of poor cost-recovery and utilities need to improve PDAMs urgently need equity infusion. At present, besides internally-generated cash, cost recovery and receive which does not generate a large enough surplus even for maintenance, equity still only equity investments from largely comes from central government grants through deconcentration funds. In this their local government owners scenario, sub-national governments continue to have no incentives to invest their own resources and therefore, no reason to take PDAMs to task for the efficient use of those moneys and no incentives to raise tariffs to cost-recovery levels. Tariffs can remain at deflated levels since the investment budget comes from external sources ­ the same situation pre-decentralization, which left utilities without adequate resources to renew assets and eventually, affecting their operations. In urban sanitation the In urban sanitation, for which willingness-to-pay for collection, treatment and disposal challenge is to put in services is low and the public goods nature of the service is more prominent, there is place appropriate cost- reason for cost-sharing between central and sub-national government ­ the question is sharing between central how can this be arranged so that sub-national governments have an incentive to operate and sub-national government and to and maintain the system? It is not likely that users will pay for the full cost of urban incentivize good sanitation since households do not suffer the full cost of poor sanitation directly. This operations and means that in order to financially sustain the system, sub-national governments will likely maintenance need to subsidize their operations and maintenance (O&M). O&M costs could range between 3-5 percent, sometimes even up to 10 percent, of the annualized capital investment. Depending on the technology chosen and system capacity, this could be seen as a significant cost given the multiple expenditure priorities of sub-national governments. Is there an incentive for sub-national governments to operate and maintain these infrastructure, where, on the one hand, the general public does not seek these services (low willingness to pay, not generally an election issue ), and on the other hand, programs promoting sanitation, at best, still only provide grants towards capital investments? The Ministry of Finance is The Ministry of Finance has been championing and exploring approaches to increasing exploring approaches to sub-national responsibility through the improved use of budget mechanisms to fund local increase sub-national governments­ such as reforms on to the annual special allocation grant, DAK, and the responsibility for water introduction of incentive grants (Water Hibah) for sub-national governments through the and sanitation provision on-granting mechanism. At present, these reforms still only emphasize capital investment funding, but can have wider implications for incentivizing good operations and maintenance behavior. The Water Hibah program presently seeks to reimburse a part of sub-national government investments for water supply development benefiting poor households. This approach already incorporates innovations in incentives delivery since it encourages sub-national governments to ensure that the utility is able to provide working connections and since the grants are contingent on sub-national governments investing in equity in the utility. In future phases, it is conceivable to design a similar mechanism, for instance, for reimbursing part of the cost of bringing volumes of domestic waste to treatment facilities, the capital financing for which could be from other sources, such as the private sector. THE WORLD BANK | BANK DUNIA December 2010 37 Indonesia Economic Quarterly Maximizing opportunities, managing risks 5. National Monitoring and Evaluation (M&E) in Indonesia Monitoring and Program monitoring and evaluation (M&E) information increases our understanding of the evaluating the government's ability to deliver goods and services. For poor households access to public performance of public goods and services is essential because they cannot afford to purchase comparable programs tells us to what goods in the private sector. Besides looking at changes in the overall poverty rate, usually extent public expenditures are measured in terms of household expenditures, one way to evaluate the government's addressing the most progress in alleviating poverty is through the delivery and receipt of public goods. This can pressing manifestations be estimated as a measure of outputs and outcomes of public programs that are targeted of poverty to meet basic human needs and enhance opportunities, such as access to education, health services and infrastructure. In the context of M&E, outputs refer to the products, goods and services produced by a development intervention. In contrast, an outcome is a change in behavior or a particular condition resulting from the intervention. More specifically, M&E information can help answer questions like: Do poor children have access to public education? Do poor women receive prenatal care? Are the social safety net programs reaching their intended beneficiaries? The answers to these questions tell us about the effectiveness of the government programs focused on alleviating the most pressing manifestations of poverty. a. International shift towards performance-informed policy making, planning and budgeting Globally, stakeholders Globally there is increased demand for M&E information and pressure to develop systems are demanding increased that are responsible for producing this information. This shift is a response to accountability and stakeholders' demands for increased transparency and accountability, and pressure for transparency from governments to demonstrate tangible development outcomes. The shift is largely government influenced by the experiences of Organisation for Economic Co-operation and Development (OECD) countries. Successful M&E systems Internationally, there exist diverse organizational configurations of M&E systems. Despite involve the intensive use this diversity, there exists international consensus regarding three characteristics that are of quality and reliable common to successful systems (1) intensive use of the information in policy making, information within planning and budgeting; (2) the information produced by the system is of sufficient quality systems robust to changes in government and considered reliable; and (3) the system is sustainable in terms of its ability to administration withstand changes in the government's administration (Mackay, 2010).14 In addition to these shared characteristics, there are three general models of M&E systems (Table 11). An independent, external The first type of system is where an independent, external body located outside the body may be responsible government is responsible for carrying out M&E activities. Examples of independent for M&E or government bodies include civil society organizations, universities and research institutions. This systems may be used in a system allows for the greatest transparency, accountability, and credibility of information. centralized or decentralized structure Disadvantages include: a lack of access to adequate information, absence of contextual knowledge, and the inability to provide comprehensive information on the whole of government programs and institutions. An example of an external body is the Bogotá 15 Cómo Vamos initiative in Colombia (Briceño, 2010). The second model is a centralized system. This type of system is a powerful tool for planning and budgeting. In Chile, for example, the Management Control Division of DIPRES is located in the budget department of the Ministry of Finance. The system manages four areas of work: evaluation of programs and institutions, instruments for monitoring and supervision, institutional salary incentives, public management modernization fund. For the 2010 budget, 150 government institutions adopted approximately 1,200 performance indicators and there are 28 evaluations of programs and institutions (Briceño, 2010). The third model is a decentralized government system. The advantages of this system include: ease of access to information and high likelihood that information will be used 14 Mackay, Keith. 2010. Conceptual Framework for Monitoring and Evaluation. PREM Notes, Special Series on the Nuts and Bolts of Government M&E Systems. Number 1. World Bank: Washington D.C. 15 Briceño, Bertha. 2010. Defining the Type of M&E System: Clients, Intended Uses, and Actual Utilization. PREM Notes, Special Series on the Nuts and Bolts of Government M&E Systems. Number 2. World Bank: Washington D.C. THE WORLD BANK | BANK DUNIA December 2010 38 Indonesia Economic Quarterly Maximizing opportunities, managing risks internally. Disadvantages include less standardization, uneven methodological rigor and heterogeneous quality of information. In a decentralized context, a national board can oversee the system and ensure consistency; for example, the National Council for the Evaluation of Social Development Policies (CONEVAL) in Mexico establishes unified standards and guidelines for 130 federal programs (Briceño, 2010). Table 11: M&E systems Model Advantage Disadvantage Example Independent, Transparency, accountability, Lack of access to Colombia external body and credibility of information information, absence of contextual knowledge, inability to provide comprehensive M&E Centralized, Ability to standardize M&E best Requires a clear mandate, Chile government- practices, better integration into sufficient M&E and owned planning and budgeting cycles, managerial capacity of the power to enforce executing agency, recommendations resulted from interagency coordination M&E Decentralized, Ease of access to information, Less standardization, Mexico government- high likelihood information will uneven methodological rigor owned be used internally and quality of information produced Source: Briceño (2010) b. M&E in Indonesia Indonesia is transforming Indonesia is currently transforming its planning, Table 12: National Level Indicators its planning, policy policy making and budgeting from a system based used by Central Governments making and budgeting on inputs to a system based on performance. The from a system based on Country and Year Indicators success of this transition depends on the inputs to a system based on performance availability of reliable, timely and relevant M&E Canada (2003) 400 information. Indonesia currently has 76 ministries responsible for 524 programs with approximately France (2005) 1,178 3,000 activities, and more than 10,000 output and Indonesia (2010) 10,000+ outcome indicators. This does not include Korea (2007) 2,037 programs that are developed and funded at the subnational level. Table 12 provides a comparison Netherlands (2002) 454 of the number of national level indicators used by United Kingdom (1998) 153 different central governments. 16 Source: Thomas (2010) Before a coordinated Over time most countries try to reduce the number of indicators they use. In Indonesia, M&E system can be each national program administered through a line ministry is divided into activities and achieved, a better sub-activities. Many major national programs have a system for monitoring outputs at the understanding of activity and sub-activity level. This situation is further complicated in the context of informational needs of the central coordinating decentralization, and questions about the mandate for central ministries and agencies to agencies needs to be require M&E reporting from subnational governments. Before a coordinated M&E system established can be achieved, a better understanding of informational needs of the central coordinating agencies needs to be established. The M&E system should strive to balance information needs of national coordinating agencies with the needs of program managers and implementers. The new M&E regulations In recent years a number of national coordinating agencies have developed their own have created concerns regulations that mandate reporting of M&E information from ministries, agencies and about the quality of smaller offices responsible for program management and implementation (Table 13). information reported, These regulations have created concerns about the reporting burden, overlapping and access to information and overall M&E policy redundant information requests, information gaps, access to information and overall M&E coordination policy coordination. 16 Thomas, Theo. 2010. Performance Based Budgeting and Monitoring and Evaluation Workshop Introduction, Overview and International Experiences. Presentation. World Bank: Jakarta. THE WORLD BANK | BANK DUNIA December 2010 39 Indonesia Economic Quarterly Maximizing opportunities, managing risks Table 13: Agencies and M&E Mandates in Indonesia Agency Mandate Bappenas PP39/2006: evaluation of development plans UKP4 Inpres 1/2010: acceleration of national development priorities MenPAN PP09/2005: evaluation of accountability of government institutions Ministry of Home PP03/2007: local government management report (LPPD) to Affairs government PP06/2008: local government management evaluation guidelines Ministry of Finance PP21/2004: design of work plan and budget ministries PP08/2006: financial and government institutions performance report Source: World Bank staff The current national five The M&E reporting mandate of the National Development Planning Agency (Bappenas) is year plan includes a based on regulation PP39/2006. Besides the information collected by PP 39/2006, the matrix with output and current five year national plan (RPJMN, 2010-2014) includes a matrix with output and outcome indicators for outcome indicators, for each activity and program that relates to a national development each activity and program related to the national priority specified in the plan. Bappenas worked with each of the 76 line ministries to development priorities develop the indicators published in the matrix. Since this is the first year these indicators have been published, it remains unclear how Bappenas will collect this information and how the information will be used to support national planning and budgeting decisions. UKP4 collects The Presidential Work Unit for Development Monitoring and Control (UKP4) was created information related to to serve the president in response to information gap in Indonesia. The information tangible program collected focuses on short-term programmatic milestones that are reported to the milestones every two President and his cabinet as a way of monitoring the work of the ministers, their offices, months and specific programs (as opposed to the longer-term planning and policy making conducted by other coordinating agencies). Presently, the system collects information on 370 indicators, related to 155 action plans, representing 70 programs implemented by 45 line ministries. MenPAN seeks to The Ministry of State Apparatus and Reform (MenPAN) evaluates performance and evaluate other accountability of all government institutions. MenPAN's mandate can be differentiated government institutions from other coordinating agencies because it seeks to evaluate government institutions, as opposed to focusing on the outputs or outcomes of a particular program (although this is a factor in their evaluation formula). Their evaluation focuses on five aspects of performance: planning, measurement, report, evaluation and achievement. Each aspect is weighted and the total score is used to rank institutions. There is no standardized form to collect this information; the ministry uses a combination of interviews, direct observation and secondary data. The results of the evaluation are reported annually to President. The Ministry of Home The Ministry of Home Affairs (Depdagri) also has an M&E mandate to conduct three types Affairs monitors and of evaluations that focus on the subnational level: (1) performance evaluation of local evaluates development at policy makers and executors (EKPPD), (2) local capacity to achieve the goals of the subnational level The decentralization (EKPOD), and (3) evaluation of geographic areas that recently received autonomy (EDOB). These evaluations are collaboration between a national team (led by the Ministry of Home Affairs) and local technical team. The results of these three evaluations are reported at different intervals to the President. Ministry of Finance is The Ministry of Finance is currently developing an M&E system to be implemented in currently developing a 2011. The system will contain a number of indicators including budget realization, output M&E system based on the target realization and a number of indicators on the quality of planning and quality of principles of performance spending. Performance as measured against these indicators will provide the basis for a based budgeting recommendation on "rewards and punishment" through budget allocation. To summarize the aforementioned national coordinating agencies have distinct spheres of influence and M&E mandates; however, there exists overlapping information needs, particularly in terms of output and outcome information and subnational information. THE WORLD BANK | BANK DUNIA December 2010 40 Indonesia Economic Quarterly Maximizing opportunities, managing risks c. Moving towards performance-informed budgeting and developing a coordinated M&E system Indonesia is shifting Indonesia is currently moving towards a system of performance informed budgeting. A key towards a performance input in this system is M&E information. The process by which the government will use informed budgeting this information to make resource allocation decisions is yet to be determined. The use of system and an important M&E information will require consensus regarding indicators and targets, nuanced input in this system is M&E information analysis of M&E information, safeguards to protect the system from perverse incentives related to the setting of targets as well as the reporting of M&E information, and developing a system for checking the credibility of information reported. Future steps in As Indonesia moves towards developing a coordinated M&E system, future steps will developing coordinated likely include a series of discussions among the key agencies. Priority areas for M&E systems will likely developing the M&E system include the sharing of information on current and planned include greater changes to M&E systems, addressing weakness of existing agency-level M&E systems, information sharing, improving systems and and working towards a more coordinated national M&E system. building a consensus on indicators, formats and Because of the relative newness of many of the M&E regulations and the shift in planning coordination across and budgeting from a system that is based on inputs to one that is based on performance, agencies a number of agencies are currently developing new systems or revising old M&E regulations. There appears to be a need and scope for more information sharing across agencies regarding current and planned changes. The individual line ministries are often aware of the weakness of their own M&E systems. Some examples of weakness include, the quality of information reported, the level of detail that is collected, the reporting burden on program staff, the time it takes for information to become available to users, and reporting compliance. More support should be given to ministerial efforts to improve the overall quality and credibility of M&E information. Agencies that require M&E information across sectors have individual mandates to collect this information, and have their own spheres of influence and information needs. Many of these mandates, however, require collecting the same or similar information, for instance, activity output and program outcome information. While at the same time, there exist information gaps that need to be addressed. Some of the greatest challenges in developing a coordinated M&E are developing consensus regarding specific indicators, reporting formats and information sharing protocols. The system should start In conclusion, based on international experience, it will likely take Indonesia several years small and keep the to develop a fully functioning M&E system. The system should start small and keep the international lessons international lessons about information utilization, information quality and system about information sustainability in the forefront. This process will require intensive dialogue and policy utilization, information quality and sustainability coordination among key agencies, ministries, program managers, program implementers in the forefront and subnational governmental units. The development of a coordinated M&E system will also require building capacity at all levels, particularly in terms of those designing the systems, making methodological decisions, selecting indicators, and those responsible for collecting information on the ground. THE WORLD BANK | BANK DUNIA December 2010 41 Indonesia Economic Quarterly Maximizing opportunities, managing risks APPENDIX: SNAPSHOT OF THE INDONESIAN ECONOMY Figure 1: GDP growth moderates Figure 2: Contributions to GDP expenditures (per cent growth) (quarter-on-quarter, seasonally adjusted) Per cent Per cent Per cent Per cent 4 8 4 4 Year on year (RHS) 3 6 2 2 QoQ seas. adjust 2 (LHS) Average 4 (LHS)* 0 0 1 2 -2 -2 0 0 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Discrepancy Net Exports Investment Sep-03 Jun-05 Mar-07 Dec-08 Sep-10 Government Private cons GDP *Average QoQ growth between Q1 2000 ­ Q3 2010. Source: BPS via CEIC and World Bank Sources: BPS, World Bank seasonal adjustment Figure 3: Contributions to GDP production Figure 4: Motor cycle and motor vehicle sales (quarter-on-quarter, seasonally adjusted) (levels) 2 Per cent Per cent 2 800 '000 '000 80 Motor cycles (LHS) 1 1 600 60 400 40 0 0 200 Motor vehicles 20 -1 -1 (RHS) Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Other (incl services) Retail trade 0 0 Com & trans Manufacturing Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Mining and construction Agriculture Source: BPS via CEIC Source: CEIC Figure 5: Consumer indicators Figure 6: Industrial production indicators (index levels) (year-on-year growth) Index Index Per cent Per cent 120 310 30 30 BI Retail BI Consumer Industrial sales (RHS) Survey Index Production (LHS) 20 20 270 100 10 10 230 0 0 190 80 -10 -10 150 Electricity -20 Cement -20 60 110 -30 -30 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Source: BI via CEIC Source: CEIC THE WORLD BANK | BANK DUNIA December 2010 42 Indonesia Economic Quarterly Maximizing opportunities, managing risks Figure 7: Real trade flows Figure 8: Balance of Payments (quarter-on-quarter growth) (USD billions) Per cent Per cent USD bn USD bn 10 10 8 8 Balance Current Account 4 4 0 0 Exports 0 0 Errors -10 -10 -4 -4 Imports Financial & Capital Account -20 -20 -8 -8 Sep-07 Sep-08 Sep-09 Sep-10 Sep-07 Sep-08 Sep-09 Sep-10 Source: CEIC Source: BI and World Bank Figure 9: Trade balance Figure 10: International reserves and capital inflows ( USD billions) (USD billions) USD bn USD bn USD bn USD bn 6 15 100 50 Exports (RHS) Capital inflows, (RHS) 4 10 90 30 2 5 80 10 0 0 70 -10 Trade Balance (LHS) 60 -30 -2 -5 -4 -10 50 -50 Imports Reserves (LHS) (RHS) -6 -15 40 -70 Oct-07 Oct-08 Oct-09 Oct-10 Mar-07 Feb-08 Jan-09 Dec-09 Nov-10 Source: BPS and World Bank Source: BI and World Bank Figure 11: Term of trade and monthly export and import Figure 12: Inflation and monetary policy chained Fisher-Price indices (month-on-month & year-on-year growth, percent) (index) index 2000=100 index 2000=100 Per cent Per cent 3 15 300 300 Headline Inflation YoY 250 250 (RHS) Core Inflation, YoY Terms of trade (RHS) 200 200 2 10 BI Rate 150 150 (RHS) 100 Chained export price 100 1 5 Inflation MoM 50 50 (LHS) Chained import price 0 0 0 0 Jun-04 Jun-06 Jun-08 Jun-10 Nov-07 Nov-08 Nov-09 Nov-10 Source: BPS and World Bank Source: BPS and World Bank THE WORLD BANK | BANK DUNIA December 2010 43 Indonesia Economic Quarterly Maximizing opportunities, managing risks Figure 13: Monthly breakdown of CPI Figure 14: Inflation amongst neighboring countries (percentage point contributions to monthly growth) (year-on-year, November 2010) Per cent Per cent Per cent 1.8 1.8 Volatile 0 2 4 6 8 Administered Core Headline Inflation Indonesia 1.2 1.2 *China Korea 0.6 0.6 *Thailand *Phillipines 0.0 0.0 *Malaysia *Japan -0.6 -0.6 0 2 4 6 8 Per cent Nov-08 May-09 Nov-09 May-10 Nov-10 Sources: BPS and World Bank *October is latest data point Sources: National statistical agencies via CEIC, and BPS Figure 15: Domestic and international rice price comparison Figure 16: Poverty, employment, and unemployment rate ( percent; IDR ) (yearly data points) 100 Per cent Rp/kg 10,000 Per cent Per cent Percentage Vietnamese rice 25% 50 20 spread broken (RHS) Poverty rate (RHS) (LHS) 40 Unemployment and Formal 15 50 7,000 employment rate (LHS) 30 10 20 0 4,000 5 10 Domestic rice , IR-III -50 (RHS) 1,000 0 0 Nov-04 Nov-06 Nov-08 Nov-10 2006 2007 2008 2009 2010 Sources: PIBC, FAO and World Bank Labor data from February Sakernas Source: BPS, and World Bank Figure 17: Regional equity indices Figure 18: Broad Dollar Index and Rupiah spot (daily, index) (daily, index and levels) Index Jan09=100 Index Jan09=100 Index IDR per USD 300 300 120 8500 IDR/USD JCI (RHS) 250 250 110 9500 200 200 BSE 100 10500 Dollar Index 150 150 (LHS) SET 90 11500 Shanghai 100 100 IDR Appreciation SGX 80 12500 50 50 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jan-09 Jul-09 Jan-10 Jul-10 Sources: World Bank and CEIC Sources: World Bank and CEIC THE WORLD BANK | BANK DUNIA December 2010 44 Indonesia Economic Quarterly Maximizing opportunities, managing risks Figure 19: 5 Year local currency bond yields Figure 20: Sovereign USD Bond EMBI Spreads (daily, percent) (daily, basis points) Per cent Per cent Basis points Basis points 20 20 1050 200 900 Indonesian EMBI USD 150 15 15 bond spreads (LHS) 750 100 600 50 10 Indonesia 10 450 0 Philippines 300 -50 5 Thailand Malaysia 5 150 Indo sreads less Global -100 United States EMBI average (RHS) 0 0 0 -150 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Sources: World Bank and CEIC Sources: World Bank and CEIC Figure 21: International commercial bank lending Figure 22: Banking sector financial indicators (monthly, index) (monthly, percent) Index Jan08=100 Index Jan08=100 Percent 170 170 Percent 100 10 Indonesia Loan to Deposit Ratio (LHS) 150 150 80 8 India Malaysia 60 6 130 130 Non-Performing Loans Singapore (RHS) 40 4 Return on Assets Ratio 110 110 (RHS) Thailand 20 2 USA Capital Adequacy Ratio 90 90 (LHS) 0 0 Jan-08 Sep-08 May-09 Jan-10 Sep-10 Jan-06 Dec-06 Nov-07 Nov-08 Oct-09 Sep-10 Sources: World Bank and CEIC Sources: BI and World Bank THE WORLD BANK | BANK DUNIA December 2010 45 Indonesia Economic Quarterly Maximizing opportunities, managing risks Table 14: Budget outcomes and estimates (IDR trillion) 2009 2010 2010 (p) 2010 (p) 2011 (p) Revised Semester 1 WB Actual Budget Budget report estimates A. State revenues and grants 848.8 992.4 994.7 968.4 1,104.9 1. Tax revenues 619.9 743.3 738.9 708.9 850.3 o/w natural resources 317.6 362.2 360.9 349.4 420.5 - Oil and gas 50.0 55.4 55.3 52.2 55.6 - Non oil and gas 267.5 306.8 305.6 297.2 364.9 2. Non tax revenues 227.2 247.2 253.9 257.5 250.9 o/w natural resources 139.0 164.7 164.7 157.3 163.1 - Oil and gas 125.8 151.7 151.5 141.2 149.3 - Non oil and gas 12.8 13.0 13.2 16.2 13.8 B. Expenditure 937.4 1,126.1 1,089.8 1,037.5 1,229.6 1. Central government 628.8 781.5 742.4 694.6 836.6 2. Transfers to the regions 308.6 344.6 347.4 342.9 393.0 C. Primary balance 5.2 -28.1 5.7 26.0 -9.4 D. SURPLUS / DEFICIT (88.6) (133.7) (95.1) (69.1) (124.7) Deficit (per cent of GDP) (1.6) (2.1) (1.5) (1.1) (1.8) Note: *World Bank revenue forecasts are based on a different methodology to the government to derive projections for nominal GDP (see Part C of the June 2010 IEQ for a full discussion). Source: MoF and World Bank estimates. Table 15: Balance of Payments (USD billion) 2009 2010 2008 2009 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Balance of Paym ents -1.9 12.5 4.0 1.1 3.5 4.0 6.6 5.4 7.0 Per cent of GDP -0.4 2.3 3.5 0.8 2.4 2.6 4.1 3.1 3.8 Current Account .1 10.7 2.5 2.5 2.1 3.6 2.0 1.8 1.3 Per cent of GDP 0.0 2.0 2.2 1.9 1.5 2.4 1.2 1.0 0.7 Trade Balance 9.9 21.0 4.1 5.1 5.0 6.8 5.2 5.2 5.2 Net Inome & Current Transfers -9.8 -9.2 -1.6 -2.1 -2.3 -3.2 -3.2 -3.4 -3.9 Capital & Financial Accounts -1.8 3.5 1.6 -1.8 2.5 1.3 4.8 4.4 6.5 Per cent of GDP -0.4 0.6 1.4 -1.4 1.7 0.8 3.0 2.5 3.5 Direct Investment 3.4 1.9 .5 .4 .5 .6 2.3 2.0 2.5 Portfolio Investment 1.8 10.3 2.0 1.9 3.0 3.5 6.2 1.1 6.1 Other Investment -7.3 -8.8 -.8 -4.1 -1.0 -2.9 -3.6 1.3 -2.1 Errors & Om issions -.2 -1.8 -.1 .4 -1.1 -.9 -.2 -.8 -.8 Foreign Reserves* 51.6 66.1 54.8 57.6 62.3 66.1 71.8 76.3 86.6 Note: * Reserves at end-period. Source: BI and BPS. THE WORLD BANK | BANK DUNIA December 2010 46